Economic Growth Continues, Making Rate Hike Probable

By Rubin, James H. | THE JOURNAL RECORD, October 29, 1994 | Go to article overview
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Economic Growth Continues, Making Rate Hike Probable


WASHINGTON _ Barely slowed by a pile of interest-rate increases, the national economy is still bubbling _ making it more likely even higher rates are on the way.

But strong growth figures for the third quarter reported Friday by the Commerce Department were balanced by benign inflation data that helped buoy financial markets.

Led by higher consumer spending, business investment and government purchases, the gross domestic product _ the total output of goods and services produced in the United States _ grew at a 3.4 percent annual rate in the summer. That was slower than the 4.1 percent rate in the spring, but easily exceeded analysts' expectations.

"The economy is still humming along, but not so fast as to generate an immediate worsening of inflation," said economist Robert Dederick of the Northern Trust Co. in Chicago. "The pace is one that does suggest if it continues, inflation pressures will emerge later."

The economy is "probably a bit too spry for the Federal Reserve's liking," said Robert Barr of the U.S. Chamber of Commerce.

The Dow Jones industrial average was up more than 50 points by early afternoon, rising along with bond prices and the dollar on international currency markets.

Analysts said the Federal Reserve is almost certain to raise short-term interest rates a sixth time this year when its policy-making Federal Open Market Committee meets Nov. 15 _ after the congressional elections. They said the only question is how much, as the Fed tries to convince financial markets it is not losing the battle to keep inflation at bay.

"The debate will start at a half percentage point," predicted economist Eugene Sherman of M.A. Schapiro Co. in New York City. "The real debate is whether it will be three-quarters or a full percentage point. I think they'll go 1 point."

Most of the expansion in the quarter that ended Sept. 30 was due to accelerated consumer spending, which advanced at a 3 percent rate _ more than double the gain in the previous quarter.

But inventory buildup, which surged in the second quarter, increased as well. Analysts called it a clear sign that businesses are brimming with confidence and stocking up in anticipation of higher prices down the road.

The fourth quarter could mean even brisker growth, they said, if Christmas sales prove as strong as many expect.

The Clinton administration welcomed the GDP report.

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