The economy's performance last year was the weakest since the last recession, and inflation began rising slightly at year-end, the government reported yesterday.
The Commerce Department said the gross national product -- the nation's output of goods and services -- grew at a 2.3 percent rate in 1985, somewhat below the updated 2.7 forecast by the Reagan administration. It was the worst showing since the recession year of 1982, when the economy declined 2.1 percent.
The nation's large trade deficit, expected to approach $150 billion when all the figures are in for 1985, has been blamed for slowing the economy and costing hundreds of thousands of jobs in industries hurt by imports. Nevertheless, the civilian unemployment rate still dropped last year from 7.4 to 6.9 percent, the lowest level since April 1980.
The slow pace of the expansion, which surprised many economists, followed a strong performance in 1984, when GNP grew at a 6.6 percent rate while inflation remained moderate.
Meanwhile, the Labor Department reported that consumer prices rose 3.8 percent last year, an improvement from the 4 percent rate in 1984, and the same level as in 1983. However, economists cautioned that inflation began to pick up in the last three months of 1985, in part because of higher food costs and increases in import prices.
The Reagan administration has forecast that the economy will grow at a 4 percent rate in 1986 and that inflation will not reaccelerate. If inflation worsens and growth is weaker than expected, the federal budget deficit will increase, requiring deeper cuts under the Gramm-Rudman-Hollings deficit reduction law.
While many economists say that inflation in 1986 will rise only slightly above levels last year, they expect GNP to grow 3 percent at best.
White House spokesman Larry Speakes said that in addition to strong economic growth this year, the administration sees "no reason to expect a reignition of the flames of inflation, particularly in light of falling crude oil prices."
Speakes also noted that Commerce reported that GNP grew 2.4 percent in the fourth quarter -- down from an initial estimate of a 3.2 percent rise -- making it the 13th consecutive quarter of economic growth.
The economy is now in the fourth year of the recovery and many economists foresee growth continuing for at least another year.
A major influence on the economy's weak performance last year and the increase in prices in late 1985 was imports, analysts agreed. The record level of imports has diverted spending from domestic to foreign goods, and the trade deficit was a major cause of the downward revision in fourth-quarter GNP, Commerce said.
Meanwhile, import prices are beginning to rise, giving domestic companies more room to raise their prices, economists said.
In the GNP report, "the only trend was the continuing deterioration in net exports," said Allen Sinai, chief economist for Shearson Lehman Bros. "I would characterize the report as showing the economy is on a sustained growth path, but it is still soft in its underbelly, and that's trade."
Sinai added, "The best news on inflation is behind us."
Alan Greenspan, former chairman of the Council of Economic Advisers and now a private economist, also blamed imports for many of the economy's ills and said he expects a "modest short-term acceleration" in economic growth this year.
Greenspan also sees inflation beginning to accelerate. He said wage increases, which have remained moderate until now, are accelerating, and commodity prices are rising slightly.
"We are coming to the end of disinflation, but it's a very slow turn," Greenspan said. "It's like trying to turn an aircraft carrier around."
The decline in oil prices will help the economy by keeping gasoline and heating oil prices low and encouraging business activity and capital investment, economists said.
However, it also will hurt banks with large loans to energy companies and Third World countries, as well as countries, such as Nigeria and Mexico, that depend on oil as a major source of revenue. In the short run, oil price declines will have a net negative effect on the economy, Greenspan said.
The Commerce Department said GNP adjusted for inflation rose 2.4 percent in the fourth quarter, following a 3 percent rise in the third quarter.
Real final sales rose 2.1 percent and accounted for most of the increase in GNP, Commerce said. Final sales rose 5 percent in the third quarter. Business inventories also rose. Nonresidential fixed investment rose 10.3 percent and residential fixed investment increased 8.6 percent in the fourth quarter, Commerce said.
However, personal consumption expenditures dropped 0.2 percent, compared with an increase of 4.6 percent in the third quarter. Economists said the decline was largely because of the end of strong consumer automobile buying caused by discount financing programs.
Exports increased 8 percent after declining 5.1 percent in the third quarter, and imports rose 13 percent, following a 12.8 percent rise from July through September. Government purchases also rose.
GNP, after adjusting for inflation, was $3.57 trillion at the end of 1985, compared with $3.49 trillion at the end of 1984.
The GNP inflation gauge -- which measures price changes throughout the economy -- increased 4.5 percent in the fourth quarter, the highest rate since the first quarter of 1984. Inflation increased at a 2.7 percent rate in the third quarter. The higher inflation was widespread among all of the GNP components and reflected a large increase in import prices, Commerce said.
The Labor Department said that the consumer price index rose 0.4 percent last month, following a 0.6 percent rise in November. The average monthly increase last year was 0.3 percent. However, in the last three months, consumer prices jumped at a 5.3 percent annual rate, the Labor Department said.
Sharply higher food and energy prices for the second consecutive month contributed to about half of the overall increase in December, Labor said. The CPI was 327.4 last month, which means that goods costing $10 in 1967 cost $32.74 in December