WASHINGTON - The economy has slowed sharply, growing at a rate of only 2.1 percent in the third quarter, a modest pace that many analysts believe will continue through 1997.
The prospect for moderate growth and low inflation sent financial markets higher on Friday. The Dow Jones industrial average was up 46 points in afternoon trading only a day after recording a gain of 127 points, the second-biggest point jump in history.
While just two weeks ago Federal Reserve Chairman Alan Greenspan had worried aloud about "irrational exuberance" in the markets, private economists said the central bank's actions, leaving interest rates unchanged at their final meeting of the year, were speaking louder than Mr. Greenspan's words.
"We have an ideal situation right now as far as the market is concerned," said David Wyss, economist at DRI-McGraw Hill Inc. in Lexington, Mass. "We have a pattern of slow, but steady growth, low inflation and declining interest rates."
"It's the tortoise economy - slow and steady."
The 2.1 percent GDP growth rate in the July-September quarter, represented a small upward revision from a 2 percent estimate the government made just a month ago. The small newfound strength was concentrated primarily in a bigger buildup of business inventories.
Many economists believe the GDP is growing around the 2 percent level in the fourth quarter and is likely to remain in a 2 percent to 2.5 percent range for all of 1997.
That range would match the target set by the Federal Reserve, which is aiming for moderate growth as a way of prolonging an expansion that is already in its sixth year. Analysts believe as long as growth stays at these levels the Fed will continue to delay boosting interest rates.
The government's final look at third-quarter GDP showed that inflation has remained well-behaved. A price measure tied to the GDP was rising at an annual rate of just 1.7 percent, the best showing in four years.
The government also reported a revised estimate for after-tax profits, showing they fell by 1.4 percent in the third quarter, the biggest decline since early 1994.
The slowdown in the third quarter economic activity reflected a big dropoff in consumer spending, which rose at a barely perceptible 0.5 percent rate, the weakest performance in nearly five years.
Consumer spending accounts for two-thirds of economic activity and this sector will have to rebound in the current quarter for the forecast of 2 percent growth to become a reality.
With less than a week to go, reports on retail sales activity have been generally upbeat, in sharp contrast to the dismal Christmas performance a year ago.
The country's trade deficit, which has worsened considerably this year, subtracted $22.7 billion from growth in the third quarter, but analysts said a sharp narrowing in the October deficit reported on Tuesday was making them redraw their fourth-quarter GDP forecasts.
Bruce Steinberg, an economist at Merrill Lynch in New York, said he now believed a narrowing trade deficit would add rather than subtract from fourth-quarter growth, causing him to revise his GDP estimate up to a range of 2 percent to 2.5 percent.
"Looking ahead, we expect the U.S. economy to grow around 2 percent during 1997, consistent with a stable inflation rate," he said. Steinberg said the Fed could well stay on hold for most of the year.