Economy, in Surprise, Expands at Strong Pace

WASHINGTON —  The economic news turned positive Friday as U.S. officials reported that America’s economy performed much better than expected between July and September and the world’s seven richest countries agreed on a plan to stabilize global financial upheaval.

The U.S. economy, displaying a surprising reservoir of strength over the summer despite a gallery of global financial pressures, expanded at a healthy 3.3% annual rate, the Commerce Department said.

The initial estimate for growth in the nation’s economic output in the July-September quarter exceeded most forecasts. The news cheered financial markets--the Dow Jones industrial average gained 97 points--even though it raised questions about whether the Federal Reserve would continue cutting interest rates.

Still, the latest report underscored a decline in business investment and the pounding that the Asian financial crisis is continuing to deliver to U.S. exports. Although American consumers spent more than expected during the summer, forecasters still see a slowdown in coming months as a less-confident, debt-saddled public cuts back on major purchases.

“Clearly, the mountaintop is behind us. The economy is slowing,” said Sung Won Sohn, chief economist at Norwest Corp., a regional Minneapolis bank that is scheduled to merge with Wells Fargo on Monday. “But it looks like we are heading for a soft landing.”

Separately, leaders of the world’s major industrial democracies formally endorsed a White House plan to provide new credit lines for emerging nations that are vulnerable to the sort of investor panic that plunged much of Asia into crisis earlier this year.

The new approach, designed to allow countries to defend themselves before financial panic erupts, is a departure from the practice of waiting until a full-scale crisis is in progress.

Such lending, to be supervised by the International Monetary Fund, seemed all but certain to be tried shortly in Brazil, which is negotiating with the IMF for a $30-billion aid package.

The plan was announced Friday in London and Washington by the Group of 7 nations, which have been struggling for a way to contain the financial turmoil that has already spread from Asia to Eastern Europe and now menaces Latin America.

While the outlines remained vague Friday, the G-7 said there would be “appropriate private sector involvement” in providing emergency credit and that they “would welcome” enhanced efforts by the World Bank to shore up the social safety nets of nations in financial crisis.

In their statement, the nations pledged to put in place new commitments “immediately.” They agreed that “we need to widen our efforts to strengthen the international financial system,” including possible new regulations, strategies for crisis response, strengthened financial systems in emerging nations and ways to keep exchange rates from going haywire.

“The world’s leading economies have linked arms to contain the financial turmoil,” President Clinton said of the agreement, which also would require the IMF to operate less secretively, charge debtor nations more for emergency loans and have debts repaid more promptly. “This line of credit gives us a powerful new tool that can be used when it will do the most good.”

Yet even as Brazilian officials were reportedly heading to Washington to wrap up their IMF deal, nobody was suggesting that the outbreak of financial turmoil was finally over.

Even Treasury Secretary Robert E. Rubin said cautiously: “I think there are many challenges ahead. I think there will be ups and downs.”

At the same time, Rubin described the fact that leaders of the seven nations (Britain, Canada, France, Germany, Italy, Japan and the United States) had endorsed the emerging strategy as “immensely important.”

“It’s a framework within which the international community is going to be working for a long time to come,” he told reporters at the White House.

Shadow Cast on U.S. Economy

The very problem that the G-7 struggled to address Friday--global financial hysteria and its fallout on consumers, workers and businesses--has cast a lengthening shadow over the U.S. economy.

The confidence of American consumers, for example, has fallen for four straight months, reflecting turmoil on Wall Street, a flurry of layoff announcements and political uncertainty in Washington. The steepest confidence decline was registered in October, a period not reflected in Friday’s strong GDP report.

At the same time, the latest growth figures suggested that the U.S. economy moved ahead determinedly through the summer with major help from consumers, whose spending fuels more than two-thirds of economic activity. Consumer purchases grew at a 3.9% annual rate as a key inflation index rose at an exceptionally tame 0.8% annual rate.

The report depicted a stronger U.S. economy than has been portrayed in recent news commentary. It drew a vivid contrast between the wild gyrations of the financial world and the low-inflation, low-unemployment, rising-wages economy inhabited by most Americans.

“Whatever the results of consumer confidence surveys, as employment and incomes rise, people continue to make purchases,” observed Jerry Jasinowski, president of the National Assn. of Manufacturers.

The economy’s overall 3.3% growth rate for the July-September quarter represented a pickup from the prior three months, in which it grew at a more modest 1.8% pace.

Indeed, the economy’s unexpected strength raised questions about whether the Fed, which reduced interest rates twice last month, would continue on that path. The Fed’s policy-setting committee meets again Nov. 17, and most analysts had expected a third reduction in rates.

Investors immediately concluded that the odds of a near-term rate cut had slipped, and bond prices quickly declined after the economic report. Expectations of future rate cuts provide an upward pressure on bond prices, which move in the opposite direction of interest rates.

“I think it relaxes pressure on the Fed,” said Wesley Basel, a senior economist at the RFA consulting firm in West Chester, Pa. “Most economists are saying the Fed is going to continue to ease. That might be wishful thinking on their part.”

Slower Expansion Expected in Future

Yet despite the surprisingly robust growth rate, most experts continue to expect a slower expansion in the months ahead. A consumer confidence survey by the University of Michigan slipped in October, reinforcing other evidence of declining consumer optimism. And the government reported a 1% decline in new home sales in September, the third consecutive drop from June’s record high.

The report on economic growth offered a mixture of evidence for optimists and pessimists.

Americans saved virtually nothing: 0.1% of after-tax income, the lowest quarterly rate recorded since that statistic was introduced in 1946. Despite increased spending on services, consumer purchases of big-ticket items were flat. “People are beginning to worry about the future, about losing their jobs,” Sohn maintained.

The Asian financial crisis, which has battered U.S. exporters, seemed to be less of a burden on the economy than earlier in the year, with trade reducing growth by just 0.76 of a percentage point, compared with more punishing reductions in excess of 2 percentage points during the first half of the year.

Yet that could prove misleading, because the most recent export figures may have been skewed by a temporary surge in aircraft sales. “Boeing sold a lot of airplanes, and that is not likely to be sustained,” said Norwest’s Sohn. “Asian airlines have been canceling existing orders.”

It was the first time in four decades that U.S. exports declined for three straight quarters.