Fast Growth, Low Inflation Continue in 3rd Quarter

WASHINGTON — The nation’s economy continued to grow rapidly and with little inflation in the third quarter, the government reported Friday, but analysts said the growth rate would probably slow by the end of the year.

Commerce Department figures showed the gross domestic product--the total output of goods and services after adjustment for inflation--grew at a 3.5% annual rate in July, August and September, up from 3.3% during the previous three months.

The summer growth rate was propelled by another big surge in consumer spending, which soared at a 5.7% annual rate--its strongest performance in 5 1/2 years--reflecting sharp increases in personal income.

Meanwhile, the government’s broadest measure of inflation rose at a 1.4% annual rate in the summer quarter, down from 1.8% in the previous period and its lowest since 1964.

The higher-than-predicted economic growth rate disappointed economists and some government policymakers who had hoped the economic boom would slow enough to squelch any new inflation pressures.

However, analysts said they still expect the growth rate to ease during the October-December quarter, in part as a result of the fall in U.S. stock prices in reaction to the turmoil in Southeast Asian financial markets.

As a result, analysts said, the Federal Reserve Board, which had been among those hoping the economy would have slowed by now, was likely to keep interest rates steady rather than raise them to head off inflationary pressures.

With the current turmoil in the financial markets, the Fed “doesn’t have to put on the brakes” by raising interest rates, said David A. Wyss, economist for Standard & Poor’s/DRI, an economic forecasting firm. “The fall in the stock market will do it instead.”

Bruce Steinberg, chief economist for Merrill Lynch & Co., the securities firm, agreed. “The economy will slow on its own, without any help from the Fed,” he said.

The third-quarter performance intensified debate among economists about whether the economy can maintain its current pace without generating the rising prices that have traditionally accompanied such growth.

Gordon Richards, economist for the National Assn. of Manufacturers, said the Commerce Department report “demonstrates that the economy can achieve higher growth rates without inflationary pressures.”

But Alan Greenspan, chairman of the Federal Reserve Board, told Congress as recently as Wednesday that the possibility of renewed inflation remained the biggest threat to the economic expansion.

Greenspan has called the current situation--relatively rapid economic growth, with a low unemployment rate and emerging labor shortages in several key sectors of the economy--”unsustainable.”

Nevertheless, Friday’s report contained no evidence that inflation is on the rise. The figures showed that prices have risen only 1.6% from their level of a year ago.

The report also showed:

* Consumer spending rebounded during the summer quarter, reflecting last spring’s rise in stock prices and increases in wages, despite earlier predictions that it would subside in the second half of the year.

* Business spending also picked up sharply, with investment in new plant and equipment rising at an 18.7% annual rate, from a 14.6% pace during the previous quarter. U.S. exports also grew sharply.

* The growth rate was constrained by a speedup in imports and more caution by business in replacing depleted inventories. Both are expected to continue to be a drag in coming months.

Despite the rapid pace of the recovery, the third-quarter growth rate did not even approach the 4.9% annual rate that was posted during the January-March quarter.

Most analysts are predicting that growth will slow to about 2.5% during the final three months of the year and the first part of 1998--a pace that the Fed regards as more easily sustained.

The Clinton administration rushed to claim credit for the economy’s good performance.

Janet L. Yellen, chairman of the president’s Council of Economic Advisors, said the administration’s “strategy for raising living standards and achieving higher longer-term economic growth is paying dividends.”

Commerce Department economists cautioned that Friday’s figures were only preliminary estimates and could be revised significantly as the department collects more data over the next few months.

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Gross Domestic Product

Percent change from previous quarter, at an annual rate:

3rd quarter: 3.5%

Source: Commerce Department