WASHINGTON -- The U.S. economy is racing ahead with hardly any inflation, giving the Clinton Administration cause for celebration and stirring fresh doubts whether the Federal Reserve will step in to spoil the party any time soon.
The Commerce Department's report Friday of a 5.9% jump in real gross domestic product in the last three months of 1993 marked the biggest gain in six years. Most of the growth came on strong consumer spending for automobiles and household furnishings, a housing miniboom, and a flood of business outlays for computers and other equipment.
"It really was blistering. Everything came together," said Robert Dederick, chief economist for Northern Trust Co. in Chicago. "But what makes it so impressive in my mind is that it was so driven by investment spending on the part of businesses and consumers."
For all of 1993, the economy grew 2.9%, up from 2.6% in 1992 and the strongest pace in five years.
While the growth figures were in line with market expectations, bonds rallied in reaction to the stunning inflation figures. The implicit price deflator for the final quarter rose only 1.3%, and the fixed-weight price measure was up only 2.1%.
Administration officials said the figures proved that a broad-based recovery is underway with the help of low interest rates. "There is a clear linkage between the President's economic program introduced last year and the economy's improved performance," said Laura D'Andrea Tyson, head of the President's Council of Economic Advisers.
Tyson told White House reporters that the deficit-reduction law has helped cut long-term interest rates and spur growth throughout the private sector. "With inflation remaining low and continuing improvements in the budget deficit, we expect that long-term interest rates will remain relatively low," she said.
Tyson declined to answer questions about whether the Fed should tighten monetary policy, but said, "We don't see in the numbers that we have available right now any change in inflation."
Private analysts were divided about what the Fed will do, with some insisting that an increase in rates is likely in the next few months as the economy continues to move along in high gear, while others said they expect growth to fall back below 3%.
"The Fed's not going to tighten," said Lawrence Chimerine, senior advisor to DRI/McGraw-Hill Inc. in Lexington, Mass. "The bond market is rallying now because it realizes the Fed won't tighten, and that the inflation outlook is pretty good."
Chimerine said he believes the earthquake in California and the blast of snow and cold that gripped most of the country in January will slow the economy in the first quarter, keeping inflationary fears at bay.
Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis, agreed and said he does not expect the central bank to alter rates before July. "It's very difficult to make a case for a Fed tightening, especially when you expect economic growth to decelerate," he said.
Commerce and administration officials acknowledged that the 5.9% jump in GDP was partially the result of special factors. The rebound in farm production from the drought-soaked third quarter added an estimated 0.4-percentage point to output, and auto production added another 1.5-percentage points.
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Tyson said the earthquake will probably put a dent in first-quarter GDP, but, she went on, "we believe we're on a sustainable growth path in the range of 3%." The administration is scheduled to release its revised economic forecast this week.
Some economists said they continue to believe growth will not cool enough in the first quarter of this year to prevent a rate tightening by the Fed in the spring. "You have an economy that's pretty much reached self-velocity, yet policy is stimulative even by the Fed's own admission," said Robert DiClemente, director of bond market research for Salomon Brothers Inc. "We're in a 3 1/2% growth range."
DiClemente said that while there is "no immediate inflation," Fed officials cannot afford to wait. "Today's inflation is yesterday's battle. The key question is whether policy is in tune with keeping inflation in check. The longer they sit, the more folks will question the long-term outlook for inflation, which could backfire in the bond market."
"We're finally at the stage where the main question is whether the economy will overheat," said David Lereah, chief economist for the Mortgage Bankers Association. "As long as you have an economy growing above 3%, you have some inflationary pressures growing and get into dangerous waters as far as Fed policy."
Personal spending jumped 4.0% in the fourth quarter, with over half of all consumer outlays going for autos and household goods, the Commerce report said. For 1993 as a whole, consumer spending rose a healthy 3.3%.
Soaring business fixed investment produced an annual gain of 11.7%, the biggest advance in nine years, while residential investment soared 8.7%. Both sectors reflected the drop in rates that provided businesses with more cash. At the same time, inventories did not go up much, suggesting that businesses will not have to cut output in the months ahead.
The only two sectors that weakened in the fourth quarter were government spending, because of tight fiscal conditions, and trade.
