GNP Grows at 1.3% Annual Rate--Slowest in 2 Years

WASHINGTON —  The nation’s output of goods and services grew at an annual rate of only 1.3% in the first quarter of 1985, the slowest in more than two years, the Commerce Department announced Thursday.

The growth figure, adjusted for inflation and revised downward from an earlier estimate of 2.1%, contrasted with the 4.3% increase registered by the gross national product in the last quarter of 1984, the department said. The first quarter’s growth was the lowest since the fourth quarter of 1982, at the end of the last recession, when the GNP grew only 0.5%.

On financial markets, the Commerce Department’s report sent interest rates tumbling as investors anticipated that the Federal Reserve Board would relax its credit policies to encourage faster economic growth.

The Commerce Department also reported that inflation rose in the first three months of the year.

Many private economists attributed the sluggish economy to a tidal wave of foreign goods that shows no signs of letting up.

“It really is a little bit sobering,” said Sandra Shaber, director of consumer economics for Chase Econometrics, a private economic forecasting firm. “One of the reasons for that very slow growth rate is that final sales are being siphoned off abroad. The overvalued dollar makes imports extremely attractive and cheap for American consumers and businesses.”

A. Gary Shilling, president of his own economic forecasting firm in New York, had predicted the slowdown. “Less and less production is occurring here and more is occurring abroad,” he said. “It wouldn’t surprise me at all if we saw a recession develop. It wouldn’t surprise me at all if we were in it already.”

By contrast, Richard W. Rahn, chief economist of the U.S. Chamber of Commerce and one of the most optimistic forecasters at the start of the year, admitted: “We were wrong. The economy is not as strong as we thought.”

But Howard Sharpe, chief economist of Bishop, Camp & Dewey, an interest-rate advisory service in New York, held to his optimistic outlook, predicting growth of 5% to 6% in the second three months of this year as deterioration in the nation’s trade picture slows or stops. “Employment is still growing by 3% or 4% at an annual rate,” he pointed out.

Baldrige Sees ‘Rebound’

White House spokesman Larry Speakes called economic growth “clearly lower than what we had hoped for,” and Commerce Secretary Malcolm Baldrige acknowledged: “We did have a weaker economy in the first quarter.” But he added: “We expect some rebound.”

Baldrige said economic growth for the year could still reach the Administration’s estimate of 3.9% if Congress cuts government spending and slashes federal deficits.

But Jerry J. Jasinowski, executive vice president and chief economist for the National Assn. of Manufacturers, was more pessimistic. Calling the first-quarter growth rate “bleak,” he said: “Imports are killing us. The recent drop in consumer spending, along with the need to work inventories down, will hold growth to 3% or less for the first half of the year.”

Lower Interest Rates

Michael Evans, president of Evans Economics in Washington, called the expected lower interest rates the “only silver lining in the cloud” and said they “should give a modest boost to consumer spending,” which, the Commerce Department had reported Wednesday, fell 0.5% in March. But Evans predicted that the gains would not show up until the third quarter of this year.

Aggravating the sluggish economic growth was a 26% increase in imported goods and services in the first three months of the year. Consequently, net exports plummeted by $12.7 billion (in 1972 dollars) after rising by $13.9 billion in the fourth quarter of last year.

Prices in the first quarter, as measured by the “GNP implicit price deflator,” rose by 5.3%, compared with 2.8% in the previous quarter. This measure takes into account changes in the mix of goods produced and was skewed by a large increase in energy purchases, the Commerce Department said.

The inflation yardstick that measures the price of a fixed assortment of goods also rose, however. The “GNP fixed-weighted price index” rose by 4.4% in the first quarter, up from 3.6% in the previous three months.

The Commerce Department also revised its estimate of the increase in fourth-quarter corporate profits to $8.8 billion, $1.9 billion lower than its preliminary estimate issued last month. Corporate profits declined by $8.3 billion in the third quarter of last year.