WASHINGTON — The U.S. economy appears to be growing at a sluggish 2.1% annual rate during the first quarter of 1985, the Commerce Department reported Thursday, running counter to expectations of another round of robust growth.
The department's "flash" estimate--based on only partial data for the still-unfinished period and certain to be revised later--blamed the slowdown primarily on a surge of imports that prevented U.S. manufacturers from capturing a greater share of consumer spending.
In addition, the government lowered its estimate of growth in the fourth quarter of last year to 4.3% from 4.9%.
Inflation Indicator Up
The most surprising news in the preliminary report was a big jump in one measure of inflation, but analysts called it a "statistical aberration," saying that there is no substantial evidence of any fundamental increase in inflation. A measurement called the "implicit price deflator," which reflects changes in buying patterns and price adjustments, is rising at an annual rate of 5.4%, the report said, compared to a 2.8% increase for the last three months of 1984.
Commerce Secretary Malcolm Baldrige blamed the strong dollar for curbing economic growth. "The first-quarter GNP was held down by a rebound in imports," Baldrige said. "The high dollar is the major factor in our growing trade deficit, which transfers manufacturing output and jobs to foreign producers."
Economists generally agreed with Baldrige's analysis, noting that, even though Americans remain big spenders, the output of the U.S. economy has been relatively weak since last summer, when real growth averaged just 1.6% for the third quarter.
"We're seeing a real two-tier economy developing," said Irwin Kellner, chief economist at Manufacturers Hanover Bank in New York and one of a handful of analysts who had predicted that the quarterly report would show low growth. "Consumer spending continues to roll along nicely, so services are surging ahead, but, on the goods side, domestic manufacturers are under intense pressure from imported products."
The department reported also a modest turnaround in corporate profits for the last three months of 1984, with profits from current production climbing 3.8% in the fourth quarter after a 2.8% decline the previous quarter. After-tax profits for the nation's corporations rose by 0.4% after a drop of 5.7% in the July-September quarter.
Corporate Cash Flow
For the first time, the Commerce Department began reporting on corporate cash flow, which increased 2.3% during the fourth quarter, compared to a 2% rise in the summer period.
Analysts acknowledge that their economic predictions are often off the mark. But some economists who had predicted that the economy would continue at a pace similar to the strong 4.3% growth of last year's fourth quarter remained convinced that later revisions would end up closer to their forecasts.
"I think both the GNP and inflation numbers are overstated," said Allen Sinai, chief economist for Shearson Lehman Bros. in New York. "The GNP estimate overstates weakness and inflation is exaggerated."
Most analysts expect to see the GNP figures rise somewhat as revisions are issued in the next few months. But they generally believe that economic growth during the first quarter will remain considerably weaker than it was at the end of last year.
High Growth Forecast
"I expect growth to end up somewhere between 2.5% and 3%, once all the numbers are in," said Timothy Howard, chief economist at the Federal National Mortgage Corp.
In addition to the rise in imports, analysts attributed some of the slowdown to unexpectedly severe winter weather. But Robert Ortner, chief economist at the Commerce Department, dismissed such explanations. "In all my years of forecasting, I've never seen a normal winter," he said.
The latest disappointing economic data, ironically, could lead to future improvements because the slower growth should make it easier for the Federal Reserve to allow interest rates to fall. Several analysts suggested that, if interest rates drop this spring, economic growth could be expected to pick up steam again later in the year.
Economists dismissed the unexpected jump in the price deflator because they said that it was not caused by any general rise in prices but by a sudden shift in buying patterns in January toward purchases of electricity, gas and imported oil.
Another Measure Cited
Ortner pointed out that another inflation measure, based on a fixed index of goods and services, increased only slightly, to 4.1% from 3.6%, entirely because of an annual government pay raise that went into effect at the beginning of the year.
Economists said that all other inflation indices, including the widely followed consumer price index, continue to show only modest inflation.
"Obviously, something is wrong with the inflation number," said Donald Ratajczak of Georgia State University in Atlanta. "There may be a modest, almost unperceptible increase in the underlying inflation rate, but I'm certain that this big jump is just a statistical aberration that will be reversed in the second quarter."
At the White House, spokesman Larry Speakes acknowledged that the reported economic growth was lower than the Reagan Administration had expected but added: "We continue to believe that the economy is on a path of steady growth with low inflation."