Modest Economic Growth Eases Inflation Concerns

OLD man winter put the economy in the freezer in the first quarter. The Commerce Department reported yesterday that the nation's gross domestic product (GDP) grew at a modest 2.6 percent annual rate in the first three months of the year. The economic slowdown was most noticeable in the construction area, which is weather sensitive.

Although economists had expected the weather to slow the economy, the government's preliminary report on the first quarter's economic health was slightly below expectations.

Economists expected more

Surveys indicated economists anticipated the first quarter would grow at about a 3.5 percent annual rate.

The first quarter report also reflected the effect of the California earthquake in January and a previously announced decline in exports. US aircraft manufacturers reported a big surge in overseas orders last quarter. This activity was not sustained at the beginning of the year.

Economists say there are plenty of signs that the economy has already recovered from the weather distortion. ``We are now expecting a 4.5 percent growth rate in the second quarter,'' says Sandy Batten, a senior economist at Citibank in New York. He cites stronger consumer buying and a rebound in the housing sector. ``The weakness in the first quarter was ephemeral,'' he adds.

Fed still cautious

The first quarter numbers are not likely to change the Federal Reserve Board's view that the economy is growing above its potential. ``The Fed will continue to tighten, they will see through this number,'' says Ian Borsook, a senior economist at Merrill Lynch & Co.

Although economists say the pace will pick up in the second quarter, there will be some restraints on growth. For example, auto production is now scheduled to decline.

(Separately, General Motors Company reported yesterday that its first quarter earnings jumped by 66 percent to $854 million. The results would have been higher but the auto giant took a $758 million accounting charge for retired employees.)

In another indication that the economy is back on a moderate growth pace the government reported yesterday that factory orders in March for durable goods such as cars and appliances grew at a modest 0.4 percent rate.

Economists had expected the first quarter to slow down from the 1993 fourth quarter's 7 percent growth rate.

The February trade numbers, reported on April 19, warned economists that the first quarter economic growth rate would be slower. The trade deficit soared to $13 billion. ``Demand has been satisfied by foreign production,'' explains Brian Fabbri of Fabbri Global Economics in New York.

However, there are still plenty of signs of a healthy economy. ``Consumer confidence is very good,'' says Cynthia Latta, an economist at DRI-McGraw Hill in Lexington, Mass. On Tuesday, the Conference Board reported its consumer confidence index had risen in April to 91.7, up from 79.9 in February.

One of the reasons consumer confidence is soaring is the surge in new jobs. Economists will get a better idea of how strong job growth is when the government releases the April unemployment rate on May 6. Mr. Fabbri says, however, he anticipates the numbers will show slightly less growth than March when payroll employment grew strongly. Since the International Brotherhood of Teamsters was on strike during the survey week, Fabbri points out the unemployment rate could swell by 50,000 to 60,000. ``There will have to be an adjustment for the Teamsters,'' Fabbri says.

Consumers benefit

Latta says the consumer pocketbook has also benefited from the opportunity to refinance mortgages. ``This has allowed consumers to get the balance sheets back in order,'' she explains. As a result, consumer credit has been very strong for the last five months. However, whether it stays strong is questionable since interest rates on credit cards are rising.

Despite the slower growth, Latta expects the Fed will continue to raise interest rates. So far the Fed has increased short term interest rates by 3/4 of one percentage point. DRI expects the Fed will raise rates again soon, followed by two more rate hikes later in the year.