‘Flash’ GNP Estimate Shows U.S. Economy Growing at 3.1% Rate

WASHINGTON —  The U.S. economy is growing at a faster-than-expected 3.1% rate in the April-June quarter, the Commerce Department reported Thursday in its preliminary “flash” estimate for the gross national product, but it shows few signs of emerging from the slowdown that began last summer.

In releasing the first estimate for economic output during the current period, the government also revised the first-quarter GNP downward from 0.7% to a nearly flat 0.3%. The flash forecast for the second quarter will be revised three times in the next few months as more information about the economy becomes available.

In another revision of a first-quarter figure, the department said after-tax corporate profits fell 2.8%, the fourth consecutive quarter of decline. The earlier, preliminary report had estimated a 0.7% decline in profits for the three-month period.

General Gloom Prevails

And, in a separate report, the Bureau of Labor Statistics said consumer prices rose a modest 0.2% in May, held down by a second straight monthly drop in food prices and an easing in gasoline price increases.

The second-quarter flash GNP estimate, although slightly higher than many analysts had anticipated, did little to ease the general gloom about the economy’s weakness.

“The economy is still in that no-man’s land between recession and recovery,” said Jerry Jasinowski, chief economist at the National Assn. of Manufacturers. “There are no major signs of economic strength.”

David Levine, chief economist at the Wall Street investment firm of Sanford C. Bernstein & Co., said the economy “is still fairly sluggish,” adding that he expects later revisions to show that growth will turn out even weaker during the quarter than in the preliminary estimate.

Commerce Secretary Malcolm Baldrige was somewhat more optimistic, issuing a statement saying that “the worst of the slowdown probably is behind us, and we should be back on a higher growth path by summer’s end.”

Import-Export Gap to Shrink

Baldrige acknowledged, however, that “general weakness was still evident in manufacturing, mining and agriculture--sectors hard hit by foreign competition.”

The Commerce Department report suggested that consumer spending and business fixed investment would lead the growth in the economy for the second quarter, with home building and government spending gaining moderately. Imports are expected to continue to exceed exports, but the gap should narrow.

Inflation remained moderate in both consumer prices and the GNP report, which adjusts prices for changes in output as well as inflation. Consumer prices have increased at a 3.9% annual rate for the first five months of the year. The GNP report projects inflation for the April-June quarter at 3.2%.

In the Los Angeles metropolitan area, consumer prices jumped by 1% in May from the previous month, leaving prices 4.5% higher than a year earlier. In San Diego, for which figures are published bimonthly, prices rose by 0.8% in May from March, with inflation registered at 5.4% from the previous year.

The GNP report, by suggesting that the economy is rebounding from the first quarter more than anticipated, added to fears on Wall Street that interest rates might halt their decline. The Federal Reserve Board had been widely expected to cut its discount rate to 7% from the current 7.5% in a bid to spur growth, but investors no longer are convinced that the Fed will go through with the cut.

‘A Little Stickier’

But several economists predicted that rates would continue to fall even if the Fed does not reduce its highly visible discount rate, the interest charged to banks and other financial institutions when borrowing from the central bank.

“The trend in short-term interest rates should continue down,” dropping by 0.5% to 1% before bottoming out this summer, said Robert Gough, a senior economist at Data Resources Inc., in Lexington, Mass. But he cautioned that long-term borrowing rates “should be a little stickier.”

Analysts are also sharply divided over the future course of the economy, with several anticipating further sluggish growth in the months ahead. Others said they expect the sharp declines in interest rates during the past few months to begin spurring improved economic activity soon.

“It takes a long time for lower interest rates to work through the economy,” said A. Gary Shilling, who runs an economic consulting firm in New York that bears his name. “In the meantime, consumer debt is at record levels, and it won’t take much for the consumer to simply throw in the towel.”

Sluggish Growth Seen

But Allen Sinai, chief economist for Shearson Lehman Bros. in New York, said: “The flash number is reflecting a rebound of some significance . . . (and) this suggests the services sector can carry the day and keep the economy growing, even with a weak manufacturing sector.”

Gough, reflecting the general consensus of economists, predicted that the economy would sustain sluggish growth “in the vicinity of 2.5% to 3.5%” for the rest of the year. Arguing that underlying economic performance is “actually weaker” than the second-quarter estimate--but stronger in the first quarter than the numbers suggested--he pointed out that GNP statistics have been “whipsawed” by tremendous fluctuations in imports.

Much of the strong consumer spending and capital investment in the first quarter, Gough said, “flowed overseas and made the overall GNP number look weak.”