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Spending, Investment Fuel Strongest Economic Growth Rate in Three Years

By John M. Berry
The Washington Post

WASHINGTON

Surges in consumer spending, business investment and new-home building led the U.S. economy to a solid 3.8 percent growth rate in the final three months of 1992, capping a year in which the nation's output grew at its strongest rate in three years, the Commerce Department reported Thursday.

Coming on the heels of the July-September period's 3.4 percent rate, growth for the second half of last year was the strongest in five years. The economy's stronger-than-expected performance lays to rest fears that the recovery -- though still not as robust as those following previous recessions -- could falter again as it did a year ago, analysts said.

The new economic data came as Chrysler Corp., AT&T and Coca-Cola Co. all reported healthy quarterly earnings after a steady parade of bleak reports from such victims of the recession as International Business Machines Corp. and Sears, Roebuck and Co.

But President Clinton noted Thursday that the stronger growth had so far not resulted in much of an increase in the number of workers on business payrolls.

"I think there is a lot of response to the efforts we are making now," Clinton told reporters. "There is also a lot of troubling news about lost jobs. We've got a lot of work to do ... a lot of work to do."

With Clinton focusing on the lack of job gains, the economic growth would not lead him to drop his plans to propose an economic package to spur job growth, Deputy Office of Management and Budget Director Alice M. Rivlin said Thursday.

The economy is improving "but not as fast and as surely as most of us would want and not with as much job growth as most of use would want," Rivlin told the National Academy of Social Insurance. "Therefore, there will be a package of quick initiatives to do things that ... can be job-creating and can be part of a longer-run investment in making the economy grow."

Most forecasters believe that the lack of job increases, and the accompanying weak personal-income growth, means that consumers probably cannot continue to step up their spending as they did at the end of last year. As a result, the forecasters said, growth is likely to drop back to about a 3 percent annual rate in the first half of this year.

Federal Reserve Chairman Alan Greenspan, who met Thursday morning with Clinton and his economic advisers, later told the Senate Budget Committee that it would be difficult to maintain the fourth quarter's 3.8 percent growth rate.

Despite the lack of job increases, the strong increase in the inflation-adjusted gross domestic product in the second half of 1992 was something of a vindication for former President Bush, who maintained throughout his re-election campaign that the economy was in better shape than Clinton was portraying it to be.

After adjusting for inflation, consumer spending rose at a 4.3 percent rate in the fourth quarter, with much of that gain concentrated in purchases of long-lasting goods, such as new cars.

Business investment in equipment and structures increased at a 9.7 percent rate, and spending for new-home construction shot up at a 29.1 percent rate.

Bruce Steinberg, a Merrill Lynch & Co. economist, said the consumer "performance is unlikely to be sustained during the first half of 1993. Consumers ran down their savings in the fourth quarter and made record use of credit cards in December."

Those credit cards bills are now arriving, and because Bush cut income-tax withholding last year, tax refunds over the next few months will be lower than normal, Steinberg said.

In his Senate Budget Committee testimony, Greenspan said passage of a credible deficit-reduction plan should bring down long-term interest rates.

And he all but promised that the central bank would act to offset any "drag" on the economy resulting from higher taxes and lower government spending to cut the deficit. "If we begin to see as a consequence of ... the deficit coming down, fiscal drag of significant proportions ... it will be certainly the job of the Federal Reserve to respond to that," Greenspan said.

Significant deficit reduction is not likely for another year or two at the earliest, he said, but the Fed might find it appropriate to act sooner to cut short-term rates if long-term interest rates, over which the Fed has little control, do decline, Greenspan indicated.

A key issue now is whether sustained economic growth of 3 percent or so will be strong enough to create enough jobs to bring down the 7.3 percent unemployment rate.

So far employers generally have been able to produce more goods and services without hiring many more workers because of gains in productivity -- that is, output per hour worked.