Despite Black Monday, economy posts strong finish to 1987

The economy sprinted home at the end of last year, but there are signs it will stop to catch its breath this quarter. That's the way economists are interpreting the Commerce Department's good news yesterday that the nation's gross national product (GNP) grew at a 4.2 percent annual rate in the fourth quarter despite the stock market plunge in October.

For the calendar year, the nation's GNP, its production of goods and services, grew at 2.9 percent in real terms, the same as 1986. Inflation increased only slightly to 3.4 percent compared with 2.7 percent in 1986.

This brisk expansion, however, masked a disturbing economic trend: Companies built inventories sharply as consumer spending slowed to a jog. According to the Commerce Department, consumer spending fell by $24.1 billion, resulting in a $33.7 billion rise in inventories.

``This implies some weakness in the economy with very low or nil growth in the first half of 1988,'' says David Munro, senior corporate forecaster at General Motors. If business continues to add to the swollen inventories, says economist Bob Dederick of the Northern Trust Company, ``It's a recipe for dramatic slowing later.''

Thus, the economy could begin to enter the political picture as an issue. David Hale, an economist with Kemper Financial Services in Chicago says it could resemble 1976, when Georgia Gov. Jimmy Carter claimed the economy was swinging into a recession - a charge that hurt President Ford's reelection chances. As it turned out, the country was merely caught up in an inventory swing similar to the current problem.

The rise in inventories brought cheers to Wall Street. Bond prices were up sharply yesterday morning as traders began to anticipate the slowing of the economy. Traders reasoned that such a slowing would help lower interest rates. ``From the Federal Reserve's point of view, they have to be careful what this portends,'' says Brian Fabbri, chief economist at Thomson McKinnon Securities Inc. Mr. Fabbri says many bond traders expect the Fed to move toward an easier monetary policy to keep the economy from sliding from slow growth to no growth.

While the consumer was curbing his spending, exports continued to grow at a fast clip, rising 16.2 percent. Since the Commerce Department did not have the final December data for yesterday's report, economists tried to extrapolate what the information implied for the December trade numbers, which will not be reported until early next month.

``I think it means Commerce is expecting a better set of numbers,'' says Robert Brusca, chief economist for the Nikko Securities Company International. Mr. Brusca hypothesized that a lot of imports have moved into inventory, which helped to swell the inventory numbers.

Anecdotal evidence seems to show that retailers are actively working off inventory by holding sales. At the same time, Mr. Munro says, ``We have heard that importers have cut down on their buying trips abroad.'' This would be another indication the trade deficit will improve in December while inventories stop growing.

Even if the economy slows, Munro does not expect it to dip into a recession. ``There is reasonably strong consumer confidence,'' he notes. And consumers will begin to notice the effects of a tax cut in their paychecks and an increase in social security payments. ``Disposable income will accelerate,'' he predicts.

Of course, that income may not go into buying new cars and clothes. As the Commerce Department report showed, in the fourth quarter, the personal savings rate nearly doubled.