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Economic Growth Outpaces Prior Estimates, Fueling Inflation Fears

By John M. Berry
The Washington Post

The U.S. economy grew much more strongly this spring than previously thought, according to revised figures released by the government Thursday, raising new questions for analysts and policymakers about whether inflationary pressures will soon build.

The Commerce Department, using both newly available and revised data, said the gross domestic product, adjusted for inflation, rose at a 3.6 percent annual rate in the April-June period rather than the 2.2 percent rate reported last month. GDP measures the sum of all goods and services produced within U.S. borders.

Many economists had taken that original report as confirmation that the economy had shifted to a lower gear during the spring after expanding at a 4.9 percent rate in the first three months of the year and a 4.3 percent pace in 1996's final quarter.

Stock prices plunged on the news, amid concerns that inflationary pressures might not have eased as much as thought in recent months. After a day of fluctuations, the Dow Jones industrial average closed down 92.90 points.

The question for analysts and policymakers, particularly those at the Federal Reserve, is whether economic growth will slow enough to prevent the nation's already tight labor markets from becoming so tight that inflation rises. With the national unemployment rate at 4.8 percent, and with local rates even lower in many parts of the country, the concern is that employers scrambling to find workers will raise pay and then have to raise prices more rapidly.

In July, Federal Reserve officials, thinking that economic growth clearly had slowed, took a "wait-and-see" stance and left short-term interest rates unchanged. Later in the month, Fed Chairman Alan Greenspan explained to Congress that Fed officials generally expected the slower pace of growth to continue through the rest of this year and into 1998. At a policymaking session last week, Fed officials again left rates alone.

"That whole wait-and-see' approach may be altered by these new data," said Allen Sinai, chief economist of Primark Decision Economics in Boston. "The question for the third quarter is, is a slowdown coming? So far this quarter is showing strong consumer spending, solid capital investment, resilient housing sales and construction, and, based on shipments data, exports look pretty good."

Sinai expects the economy to grow at 2.5 percent this quarter, with a decline in inventory buildup to clip about half a percentage point off what otherwise would be a growth rate of more than 3 percent.

However, with such low inflation, Sinai still rates the odds of the Fed raising rates at its Sept. 30 meeting at roughly 1 in 4. But by the following meeting in November there might be enough signs of rising inflation pressures that the Fed would tighten, he said.