The nation's economy grew at a strong 6.6 percent annual rate in the second quarter--the biggest quarterly gain in more than two years, the Commerce Department reported yesterday. President Reagan's top economic adviser immediately warned, however, that in some key ways this may be the weakest recovery since World War II.
Commerce Secretary Malcolm Baldrige said that the second quarter gross national product is rising at that 6.6 percent rate, after adjusting for inflation and seasonal variations, according to his department's "flash" projection. With the quarter not yet over, the figure is based on preliminary and partial estimates.
"As this large gain vividly demonstrates, the economy is rebounding strongly from the recession," Baldrige told Congress' Joint Economic Committee. "The two most significant contributions to the projected rise in real GNP this quarter are, first, a reduced rate of inventory liquidation and, second, accelerated growth in consumer spending."
Martin S. Feldstein, chairman of the Council of Economic Advisers, welcomed the report, saying, "I can feel more confident that this recovery really is happening . . . 6.6 percent is a good, strong quarter."
However, Feldstein also emphasized at a meeting with reporters that in some ways the recovery is still less vigorous than the average for seven previous post-war recoveries, and that the gains in real GNP in the second half of the year are apt to be lower than the 6.6 percent rate for the current quarter.
The CEA chairman also warned that required efforts to keep money supply growth under control could mean higher short-term interest rates in coming months.
The second quarter rise was the largest since the first quarter of 1981 when GNP grew at a 7.9 percent annual rate before the onset of the 1981-82 recession.
Real GNP rose at a revised rate of 2.6 percent in the first quarter, the department also said, following a 1.1 percent decline in the fourth quarter of 1982. Previously, the department had estimated first-quarter growth for real output at 2.5 percent.
Inflation, as measured by the GNP deflator, is running at a 4 percent rate this quarter, according to the flash projection. That compares with a revised 5.5 percent rate in the first quarter and a 3.7 percent rate in the final quarter of last year. The deflator previously had been estimated to be up at a 5.7 percent rate in the first quarter.
Feldstein noted that an unusual amount of the increase in production of goods contributing to the 6.6 percent increase has gone to stop the decline in business inventories rather than being channeled into housing, consumer purchases, business investment or government purchases.
With the recovery now two quarters old, the CEA chairman said, such "final sales" are rising at only a 2.5 percent rate, compared with a 5 percent average for the previous recoveries. As inventories are brought back more in line with sales, the pace of the recovery will be more nearly in line with the increases in final sales, Feldstein indicated.
He also pointed to the sharp deterioration in the country's trade balance, with net exports swinging from a $19.6 billion surplus, in current dollars, in the first quarter to a $1.8 billion deficit in the second quarter. For the year as a whole, he said, the trade sector will continue to be a drag on the recovery, with the merchandise trade deficit estimated to be a record $60 billion.
In a separate report yesterday, the Commerce Department said that new orders for manufactured durable goods rose 0.2 percent in May to a level of $83.6 billion. It was the fourth increase in the last five months but considerably smaller than the 4.3 percent and 3.4 percent increases of the two previous months. New orders for both defense and nondefense capital goods fell.
The administration officially has forecast that real GNP will rise 4.7 percent during the course of 1983. Feldstein said the current quarter's surge "makes it all the more likely" that the 4.7 percent increase will be achieved and that it may be exceeded.
Nevertheless, he said that "although the recovery is likely to continue at a solid pace for several years, there is a risk of about one chance in three that the high real interest rates caused by large budget deficits will cause the recovery to falter next year or decline to an unacceptably slow pace."
Feldstein said that he, like many economists, is uncertain how concerned to be about the recent rapid rate of growth of the money supply measure M1, which includes currency in circulation, checking deposits at financial institutions and travelers checks.
"M1 recently is a real puzzle," he said. "I don't know frankly how much weight to put on M1 at the moment." Part of the puzzle is that the broader monetary aggregates, particularly M3, which includes other types of deposits and financial assets, do not show the same rapid growth.
But Feldstein went on to say, "It would be good to see M1 moving back very gradually to the upper end of the target range that the Fed set." And he added, "I think interest rates may well have to go up as part of that process." Later, he softened that statement by saying that part of the recent increase in short-term interest rates may be the result of anticipation by financial market participants of actions by the Federal Reserve to slow M1 growth. If so, then any additional interest rate increase might be minimal, he said.
Some short-term rates are nearly a full percentage point higher now than they were during the first half of May. If current financial market pressures continue with the need for continued large borrowing by the Treasury to finance the federal budget deficit as well as private borrowing, Feldstein said the 10 1/2 percent prime bank lending rate could rise soon.