U.S.Economy Growth Pace a Slow 2.6% : GNP Falters in Face of Drought; Personal Consumption on Rise

WASHINGTON —  The U.S. economy, held back by the summer drought, expanded at a moderate 2.6% annual rate in the July-September quarter, the government said today.

The Commerce Department said the performance of the gross national product, the broadest measure of economic health, slowed in the third quarter after growing at an annual rate of 3.2% during the first six months of the year.

It was the slowest pace since the fourth quarter of 1986, when the economy grew at a sluggish 1.4% rate.

The report, however, represents an upward revision from a preliminary estimate in October, which pegged growth at 2.2%. The department attributed the revision to a higher-than-expected rise in personal consumption expenditures, which account for nearly two-thirds of economic activity. Also, non-farm business inventories grew faster than originally thought.

A price index tied to the GNP also proved more brisk than was first estimated. The index, which reflects changing consumption patterns as well as prices, rose at an annual rate of 4.7%, up from the first estimate of 4.4%. The second quarter soared at an even faster 5.5%, the highest in nearly six years.

‘Basic Picture’ Unchanged

At the White House, spokesman Marlin Fitzwater said the latest report does not change “the basic economic picture” of moderate growth and steady inflation.

“Inflation remains at about the second quarter rate. And, after adjusting for the effects of the drought, the economy continues to grow at its long-term average pace, which is 2% to 3%,” he said.

However, the revisions to the GNP were about in line with economists’ expectations and fit in with anticipation in the market that the Federal Reserve Board will soon move to curb inflation by dampening growth with higher interest rates.

Major banks on Monday raised their prime lending rate to 10.5%, the highest level since mid-1985. (Story, Page 6.) Economists expect a new round of increases as the Fed tries to restrain growth to a non-inflationary pace of 2% to 2.5%.

The Fed pushed up interest rates steadily from late March through early August. For a time, it appeared the medicine was taking hold. A number of statistical reports showed slower growth in August and September.

Government numbers released over the last three weeks, however, portray robust growth in October, the first month of the fourth quarter.

“It’s amazing how strong the momentum is now . . . , “ said David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer in New York. “We’ll be starting the seventh year of an economic expansion and the normal peacetime expansion lasts only three years.”

In an accompanying report, the Commerce Department said after-tax corporate profits rose a slight 0.2% in the third quarter after soaring 8.9% in the second quarter. The July-September gain was the lowest since a loss in the fourth quarter of 1987.