Economic growth during 1997 hits a 9-yr high

Real GDP is estimated to have increased at a solid 4.3% annual rate during the October-December period of last year. This preliminary estimate from the Commerce Dept. was just the latest in a long string of better-than average reports on U.S.

03/01/1998


Real GDP is estimated to have increased at a solid 4.3% annual rate during the October-December period of last year. This preliminary estimate from the Commerce Dept. was just the latest in a long string of better-than average reports on U.S. economic growth. The most important contributors to economic growth in the fourth quarter of 1997 were consumer spending, exports, and business investment in product inventories.

In 1997, GDP increased by 3.8% -- the strongest growth in the U.S. economy since 1988. Export sales increased by 12.5% last year -- the biggest gain in 9 yr -- while business investment jumped by 12.2%, the largest increase in the past 13 yr. Inflation was tame, rising by just 2% -- the smallest increase since 1965.

However, business investment in new plants and equipment, which has been the driving force behind this long period of economic expansion, declined during the final three months of last year. Both components of total business investment -- spending for structures and for durable equipment -- recorded declines between the third and fourth quarters. During the fourth quarter of 1997, overall business investment (the sum of these two categories) fell at a 3.6% annualized rate, after growing by an average of 16.9% during the two prior quarters. Business spending for new equipment grew at a much stronger rate for the year as a whole -- 12.2% vs a 10.9% average for 1995-96 -- but it declined at a 3.9% annualized rate during the final three months of 1997.

The drop-off in business investment spending over the final months of 1997 should be seen as a warning flag, particularly for manufacturers and distributors. While it had been widely anticipated that capital spending would cool from the exceptional growth rates registered during the second and third quarters of last year, the absolute decline in spending during the final months of 1997 came as a surprise. The crisis in Asian currency and financial markets undoubtedly played a major role in this slowdown as American firms adopted a wait-and-see attitude about the implications of the crisis for their businesses. Performance in early 1998 will tell us whether this crisis is a blip on the economic weather screen, or a full-fledged tornado.





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