Strong US growth in fourth quarter bodes well for 1999

Shrugging off global turmoil, the US economy grew at a stunning rate of 5.6 per cent in the fourth quarter of 1998, closing out its eighth consecutive year of growth, the government said yesterday. This is the strongest pace of quarterly growth since the second quarter of 1996, and was much stronger than expected.

The Commerce Department said gross domestic product (GDP) grew for all of 1998 by 3.9 per cent, the same as in 1997. Inflation meanwhile fell to its lowest level in decades under one measure.

The figures show that growth accelerated during the course of the year from 1.8 per cent in the second quarter - following a strike at General Motors' Delphi subsidiary - and 3.7 in the third. The GDP deflator, one measure of inflation, rose 0.8 per cent in the fourth quarter as compared to 1.0 per cent in the third.

Inflation using this measure was 1.0 per cent in all of 1998, down from 1.9 per cent in 1997. This is the smallest price increase since 1950.

Analysts said the combination of strong growth and low inflation will persuade the Federal Reserve to keep interest rates unchanged.

"I don't think the (Fed) will make any move, at least through the first quarter. But they have the green light to move in the wake of any problems on the financial front," said Mr Anthony Chan, the chief economist for Banc One Investment Advisors.

Mr Chan said there are few signs of inflation in wages and prices to trigger the concerns of monetary policymakers. "One of the most impressive aspects of this report is the fact that prices were so well contained. We have a miraculous situation where the economy has expanded above expectations, while inflation is coming in below expectations," Mr Chan said.

"This shows the economy has magnificent momentum going into 1999 and validates the notion that 1999 will be another nonrecessionary year," he continued. The report was the agency's first estimate of growth in the fourth quarter. Over the next two reports, GDP growth might be revised downward by as much as 0.4 percentage points due to seasonal adjustment errors that traditionally underestimate the drag caused by the trade deficit, analysts said.

Mr Kevin Flanagan, an economist with Dean Witter Reynolds, said he expects a "pullback" in personal spending and business investment, as well as a weaker trade picture, to slow economic growth this year from what he sees as an unsustainable level in the fourth quarter.

"I don't think this is sustainable. We will probably see some pullback in 1999," he said. "I don't think we are looking at concern that there will be a downturn in the economy, but I don't think you can keep a 5.6 per cent growth rate into 1999."

A weaker trade picture due to the global financial crisis subtracted 1.17 percentage points from growth in 1998, the Commerce Department said.

In the fourth quarter, final sales - GDP growth minus inventory behavior - rose 6 per cent, up from a 2.8 per cent gain in the third quarter. This is the strongest gain in final sales since the first quarter of 1992, when it rose 6.2 per cent. This is the eighth consecutive year of strong growth in the United States.