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Robust GNP Increase, Modest Price Hike Beef Up Economy : But Some Experts Warn of Possible Recession in '88

October 23, 1987|Associated Press

WASHINGTON — The government gave the struggling economy a double shot of good news today: The gross national product surged ahead at a robust 3.8% clip this summer despite a deteriorating trade performance, while consumer prices rose just 0.2% last month.

Nevertheless, some economists warned that the shock waves from this week's stock market crash increase the chances of a possible recession early next year.

The third-quarter growth in the GNP was up from 2.5% growth in the April-June quarter and was the fastest increase since a 4.4% rate during the first three months of the year.

The Commerce Department said consumer spending rose 4.8% while business investment jumped 23.7%, the steepest rate in more than three years.

But analysts point to the huge impact of consumer spending on the GNP, the broadest measure of economic health, and said the week's crashing stock prices may shake buyers' confidence and trigger a retrenchment in spending for such big-ticket items as cars and appliances.

Falling Energy Prices

The modest gain in retail prices was largely the result of falling energy prices, which nearly offset higher food costs, the Labor Department said.

Last month's gain followed a 0.5% surge in August and matched July's 0.2% advance. So far this year, consumer prices are rising at an annual pace of 4.8%.

Economists expect inflation to remain tame over the months to come--despite recent instability elsewhere in the economy brought on by the stock market plunge.

"Right now, the chief worry is a recession. And if there's a recession, inflation won't be going up," said David Wyss, chief financial economist for Data Resources Inc.

Still, retail price gains for the first nine months of 1987 are running at more than four times last year's minuscule 1.1% pace. That had been the best performance in 25 years and was largely the result of dropping oil prices, which rebounded through most of the first half of 1987.

Trade Deficit Deteriorates

If the January-September rise holds for all of 1987, the annual advance will be the highest since an 8.9% rate of inflation in 1981.

The good news on economic growth and inflation was tempered by the fact that the country's trade deficit, as measured by the GNP, deteriorated by $5.2 billion in the third quarter because of a huge jump in oil imports. The trade deficit in inflation-adjusted terms had shown improvement for three consecutive quarters before the spring setback.

"The future has become much more uncertain because of the drop in the stock market," said Lyle Gramley, chief economist with the Mortgage Bankers Assn. "We don't know how much of the loss in the stock market will be permanent and we don't know what this volatility will do to the confidence of businesses and consumers and their willingness to spend."

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