Upturn in Economy Rattles Wall Street, Soothes Clinton

The United States economy is suddenly - and surprisingly - coming to life.

The output of goods and services grew at a robust 2.8 percent annual rate in the first three months of 1996. The spurt is raising eyebrows from Wall Street to Washington.

A faster economy could bolster President Clinton's reelection chances in November, and, not surprisingly, the White House was quick to welcome the latest news.

Investors are less impressed. They worry that a too-strong economy will prompt the Federal Reserve Board to raise interest rates as a hedge against inflation. Stock and bond prices tumbled in early trading yesterday.

Behind the latest growth figures was a jump in consumer spending - particularly for new automobiles and personal computers. Business also contributed with heavy purchases of machinery and expensive electronics. The Commerce Department, in its preliminary estimate of the nation's gross domestic product (GDP) yesterday, reported the growth rate would have been even

stronger if it were not for the government shutdown, the blizzard of 1996, and a strike at General Motors.

"The message is the bounce, we did not realize the trampoline is stretched so tight," says Bob Dederick, a consulting economist with Northern Trust Company in Chicago.

The surge was more robust than expected by Wall Street economists who had anticipated a 1.7 to 2 percent growth rate. They had not anticipated that the consumer would hit the stores with such a vengeance. According to the Commerce Department, the purchases of computers added 0.8 percent to the first quarter's GDP. They had also anticipated that imports would be a larger factor.

Even though Wall Street was surprised by the economic news, the White House this week has been saying that the economy is healthy. On Wednesday morning, Laura D'Andrea Tyson, National Economic Adviser, said, "Everyone agrees the economy is the healthiest it has been in 30 years."

Confirmation of the boast came yesterday as the Labor Department reported first-time claims for jobless benefits hit a four-month low. Economists will be closely watching the employment report, which is issued today. If it shows strong growth, they expect a volatile day on Wall Street. But most economists are not concerned about an overheating economy.

"There are signs the second quarter is on the stronger side, but I'm not sure it will last," says Peter D'Antonio, a senior economist at Citibank in New York.

On Wednesday, the National Association of Purchasing Managers reported manufacturing activity in April improved for the first time since July 1995. Factory orders were also up in March. But if the transportation sector is excluded, orders were down 0.3 percent, indicating a spotty recovery in manufacturing.

Some of the economic growth is coming from the auto sector, particularly General Motors, which is recovering from a strike. Mr. D'Antonio believes the industry will add 0.8 percentage points to the GDP growth rate in the second quarter. Yet he sees demand for autos cooling as factories expand production.

There is some anecdotal evidence indicating business is strong. In Lexington, Miss., the Taylor Machine Works says orders are beginning to overwhelm its ability to produce heavy industrial fork lifts used by forest products, steel, and shipping companies. Even after a $5 million expansion, Lex Taylor, president of the 950-employee firm, says, "We are still behind the eight ball."

Another capital goods supplier, Abar Ipsen Industries, which produces vacuum furnaces used by such companies as Boeing, says it is working hard to keep up with strong demand. The company, based in Rockford, Ill., is now on an "aggressive" hiring campaign for engineers and skilled workers.

With order books tight, some businesses report prices for raw materials are rising and delivery times are getting stretched. "There is some talk of [specialty steel] price increases in July," reports Joseph F. Tetlak, president of Willoughby, Ohio-based Willow Hill Industries, which produces power-steering piston covers for the auto industry.

On the job front, economist John Silvia of Zurich Kemper Investments Inc. in Chicago expects moderate growth. "There will be no basis for the Fed to change interest rates here," he predicts. The Federal Reserve's Open Market Committee, which sets short-term interest rates, meets on May 20.

One reason the Fed may not act is that the economic reports don't indicate that inflation is a significant problem yet. Two inflation measures in the GDP report show only a modest rise in prices compared with the fourth quarter of last year. A significant portion of this rise is the result of higher energy prices which are expected to decline as the year continues.