Several factors work to take the wind out of economy's sails
Growth rate of GDP will continue its decline, primarily because of the economic crisis in Asia.
By Daryl Delano -- Modern Materials Handling, 9/1/1998
Alan Greenspan, Chairman of the Board of the Federal Reserve, has never made it easy for Fed watchers to discern what he really thinks. In recent testimony before the Joint Economic Committee of the U.S. Congress, he seemed perplexed because the historic link between unemployment and inflation was not playing out the way that economic theory would dictate. For now, the Chairman appears calm, and is apparently not inclined to raise interest rates this summer or fall. Inflation-fighting remains Job #1 however, but rates will probably go higher if the economy does not cool sufficiently on its own in the months ahead.Asia's deepening economic crisis is the most significant factor sapping the strength of the nation's business sector. Another important phenomenon holding back the economy in recent months has been the cumulative effort by manufacturers, distributors, and retailers to rid themselves of the excessive inventories that have been built up during the past year or so. The third noteworthy factor that greatly inhibited U.S. economic growth was the extensive strike affecting General Motors and its suppliers.
The Commerce Department's advance report on second-quarter Gross Domestic Product (GDP) showed the economy growing at just a 1.4% seasonally-adjusted annualized rate. This represented the slowest rate of growth in three years, and followed a first-quarter gain that was estimated at 5.5%.
Business investment in new equipment expanded at a strong 17.8% rate in the most recent quarter, showing that declining corporate profit growth is not currently having much of an impact on companies' capital spending plans for the year. Nevertheless, the second-quarter growth rate was down from the extraordinary 34.3% annualized gain for new equipment purchases that was registered during the first three months of 1998.
In all likelihood, we will look back at this second-quarter GDP gain of just 1.4% as being an anomalous low point in what we still believe will be a record-breaking period of economic expansion. Despite continued growth, however, we think that it is unlikely that the Fed will find it necessary to raise interest rates between now and early next year. The major reason for this confidence: the GDP inflation measure declined by 0.2% during the first quarter of this year, and increased by a negligible 0.4% in the second quarter.
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