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Second-Quarter Surge Surprises Economists, Renews

By Albert B. Crenshaw and John M. Berry
The Washington Post

The nation's economy grew more rapidly this spring than economists had realized, the government said Thursday - stoking fears of renewed inflation and rising interest rates, and sending the stock market sharply downward.

Reinforcing the market's worries that the economy is overheating was a second report showing that sales of new homes during July reached the highest level in five months.

The Federal Reserve and many private economists have been expecting the economy to slow during the second half of the year, relieving pressure on the central bank to raise interest rates. However, the new data caused several economists to wonder whether the slowdown would come soon enough.

"This was a real shocker," said Dave Seiders, chief economist of the National Association of Home Builders here.

But some analysts cautioned that the Federal Reserve may pay little attention to the latest upward revision in second-quarter growth. They noted that Fed officials already knew that the economy had bounced back in the spring following a winter weak spell.

Fed officials, who left rates unchanged at a recent policy-making session, have predicted growth would slow in the second half of the year and, despite the housing sales numbers Thursday, some signs still point to a slowdown. Consumer spending, for instance, was subdued in both June and July.

The new reports caused a decline in the Dow Jones industrial average Thursday: It finished the day at 5647.65, down nearly 65 points. Bond prices also sagged, though not as sharply as stocks. As bond prices fell, the yield on 30-year Treasury bonds increased to 7.03 percent from 6.98. Bond prices move in the opposite direction from expected changes in interest rates.

As is often the case, though, the upbeat reports that worried Wall Street will be viewed was good news by many Americans and the White House. The upward revision of the growth rate "strengthens our view that the U.S. economy is achieving the kind of strong economic growth that can raise America's living standards," said Clinton administration economist Joseph E. Stiglitz.

And the figures may make it harder for the Dole campaign to argue that the nation needs the stimulus of the Republican presidential candidate's proposed 15 percent reduction in personal income tax rates.

"These data do little to change our view that the second half will be slower," analysts at Stone & McCarthy, a financial markets research firm, told clients Thursday. They expect growth this quarter to be in the range of 2 percent to 2.5 percent - exactly in line with what Fed officials say they would like to see.