Economy Surges As Some Factories Run Near Capacity

Textile-company shipments are lagging behind orders. Refineries are struggling to keep up with demand for gasoline. And semi-submersible oil rigs are in short supply.

In some industries, delivery times are starting to stretch out, an indication that assembly lines can't keep up with demand. Back orders are rising. Factories are now operating at their highest rate in three years.

So far, no widespread shortages exist. But the economy is being pushed closer to the point where the Federal Reserve will hit the brakes. Recently, Fed governor Laurence Meyer warned that the economy is already near its limits, and any additional increase in factory utilization "would raise the risk of higher inflation."

This high-octane economy came into focus on Friday when the Commerce Department, in its initial estimate, said the nation's gross domestic product rose at a 4.7 percent annual rate in the fourth quarter of 1996, compared with 2.1 percent in the third quarter. The acceleration was fueled by exports and credit-card-carrying consumers. For the full year, the nation's output of goods and services rose a more modest 2.5 percent.

The fourth-quarter growth rate sparked some concern among Wall Street economists. They had expected more modest growth.

"We are getting to the point where the risks are up," says Robert Brusca, chief economist at Nikko Securities Company International in New York. The risk Mr. Brusca sees is the return of inflation, including wage hikes. He cites the low unemployment rate and the increasing muscle of organized labor. "After a while, people realize they have skills and they want to be paid for them."

Yet Merrill Lynch & Co. economist Bruce Steinberg termed the rise an "aberration" and predicted the economy would cool off again this quarter. On Friday, Dun & Bradstreet Corp. said a survey of 3,000 executives found them predicting steady, "moderate" growth in the first quarter.

This view was generally accepted by investors, who purchased bonds because the economy still showed no significant signs of inflation despite the hearty economy. The stock market roller-coastered, with the Dow Jones industrial average ending Friday down 10.77 points at 6813.09.

One reason for the positive response on Wall Street is the expectation that the Fed will sit tight when its Open Market Committee meets tomorrow and Wednesday. "The Federal Reserve will remain on hold ... given that inflation remains in check and that the pop in the fourth-quarter growth was most likely temporary," Mr. Steinberg says.

Some economists believe the strong fourth quarter stole sales from this year's first quarter. But the auto industry, which did not post a very strong finish in '96, is expected to boost production early this year. This will keep the economy humming.

Even if the Fed does not move this week, some economists expect the central bank to raise interest rates later this year, perhaps starting in March. "It will be a gradual tightening," predicts Robert Dederick, a consulting economist at Northern Trust Company in Chicago. So far, he says, the Fed "hasn't even seen the early signs of a problem."

Economists see some other factors that may help slow the pace of growth. One is the soaring US dollar. "It is in a way equal to an interest-rate hike, because it makes it increasingly difficult to sell products overseas, and it will dampen foreign demand," says Christopher Low, senior economist in New York at HSBC Markets, an international banking company.

Companies are already cutting their prices to stay competitive, Mr. Low notes. "That won't go on forever," he says, warning that the US trade deficit is likely to turn sharply negative this year.

Export performance got a year-end boost from aircraft deliveries. The US textile industry has also gained from exports, shipping a considerable amount of fabric to Mexico. Meanwhile, apparel companies send pre-cut clothing to Mexican factories that stitch the pieces together. The duty is only on the value added, which is relatively small since wages are low at the sewing plants.

Textile-industry sources say orders remain strong through the second quarter. As long as the housing industry remains healthy, this trend is likely to continue. "That pulls through a lot of fabric and carpet," says David Link, economist at the American Textile Manufacturers Institute in Washington.

The strong economy has also pushed the oil industry to provide more gasoline, diesel fuel, and home heating oil. With demand for petroleum products high, oil prices have remained buoyant. This has attracted new drilling efforts. According to Baker Hughes INTEQ in Houston, there were 807 rotary rigs drilling for oil last week, compared with 693 a year ago.

"There aren't any spare ones sitting around," says a spokesman for the American Petroleum Institute in Washington. In fact, there are now some reports that the industry is starting to build new rigs - yet another sign of a vibrant economy.

Inflationary Path?

US economic growth has sped up since 1995. Quarterly numbers track annualized change in output from the previous period.

1995 Total growth 2.0%

First qtr. 0.4%

Second qtr. 0.7

Third qtr. 3.8

Fourth qtr. 0.3

1996 Total growth 2.5%

First qtr. 2.0%

Second qtr. 4.7

Third qtr. 2.1

Fourth qtr. 4.7

Source: Commerce Department