The U.S. economy closed out 1999 with growth at a torrid pace of 5.8 percent as consumers continued their long spending spree amid some signs of increased inflationary pressures, the Commerce Department reported yesterday.
For 1999 as a whole, the economy grew 4 percent, down slightly from 4.3 percent in 1998 and 4.5 percent in 1997. The economy hasn't expanded that much over a three-year period since the recovery that followed the deep 1981-82 recession.
Remarkably, this period of strong growth has occurred not as a bounce back from a slump, but as the current expansion, which began in the spring of 1991, is about to become the longest in the nation's history.
Meanwhile, the Labor Department said its employment cost index (ECI), a broad measure of employers' labor costs that is widely regarded as the best such indicator available, rose 1.1 percent in the October-to-December period. Like the fourth-quarter 5.8 percent rate of increase in the gross domestic product, the ECI rise was greater than expected and added to concerns about the possibility that inflation may accelerate.
Together the reports raised investor worries that continued rapid growth could cause the Federal Reserve to increase short-term interest rates several times in coming months. As a result, stock prices tumbled, with the Dow Jones industrial average falling 289.15 points to close at 10,738.87, a 2.6 percent drop. The Standard & Poor's 500-stock index fell 2.75 percent, to 1360.16, and the Nasdaq composite index was down even more, 3.77 percent, closing at 3887.07. [See story, Page E1.]
The bond market response to the news was much more complicated. Yields on longer-term U.S. Treasury securities fell, but in anticipation of Fed action the yields on bills and two-year notes rose modestly.
The high fourth-quarter growth rate for the inflation-adjusted gross domestic product, which slightly exceeded the 5.7 percent figure for the previous quarter, "clearly indicates overheating with strong current spending and robust growth," said Mickey Levy, chief economist for Bank of America Corp. in New York. "The Fed definitely needs to tighten."
Central bank policymakers meet Tuesday and Wednesday, with most analysts anticipating a quarter-percentage-point increase in the Fed's 5.5 percent target for overnight interest rates and some looking for a half-point move.
Fourth-quarter growth also was bolstered by a big jump in federal government spending, primarily by the military, and a large buildup of unsold goods at businesses, which stockpiled the goods as a precaution against possible computer disruptions related to the 2000 date change.
While consumer and government spending were up sharply, housing construction declined modestly for the second quarter in a row and business investment other than in inventories rose at the slowest pace, 2.5 percent, in more than a year. The increase in the nation's trade deficit during the fourth quarter reduced the GDP growth rate by 0.7 percentage points as U.S. customers substituted additional foreign goods and services for those produced in this country.
Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd. in Valhalla, N.Y., agreed that the overall GDP report was "strong" but argued that the 5.8 percent "headline number clearly overstates the underlying strength of the economy in the fourth quarter."
Shepherdson said the unusually large increase in government spending and the inventory buildup, which together accounted for 2.6 percentage points of the 5.8 percent increase, meant that private-sector purchases were rising at a much slower pace of around 4 percent.
The Labor Department's employment cost index tracks changes in both wages and salaries, and benefit costs. Wages and salaries rose 0.9 percent during the fourth quarter, the same as in the prior three months. But employers' cost of providing benefits such as vacations, health insurance and pensions unexpectedly increased 1.3 percent, compared with 0.8 percent in the third quarter.
However, the ECI still was up only 3.4 percent in the year ended in December, the same increase as in 1998, and some analysts suggested that strong productivity growth would continue to hold down the cost of labor required to produce a particular good or service.
"Non-farm business-productivity growth appeared to have surged at a 4.5 percent annual rate, which will help to offset some of the unit labor cost pressures stemming from a surprisingly high" increase in the ECI, said Maury N. Harris, chief economist at PaineWebber Inc. in New York.
According to the Commerce report, the price index for personal consumption expenditures rose at a 2.5 percent rate in the fourth quarter, up from 1.8 percent in the previous quarter. Much of that acceleration was because of higher prices for energy products, particularly gasoline and home heating oil.
Prices for all goods and services purchased in the United States, except business inventories, increased at a 2.3 percent rate compared with 1.8 percent in the July-to-September period.
Such inflation news won't be welcomed by Fed policymakers, said economist Joe Liro at Stone & McCarthy Research Associates, a financial markets research firm.
"The data certainly add to the weight of evidence that the Fed has more work to do," Liro said. "While not suggesting that the monetary authorities have fallen behind the inflation curve, these data are consistent with our view that next week's tightening will not be the last."
CAPTION: (This graphic was not available) SURGING GDP