Fourth-Quarter 1987 National Economic Activity And First-Quarter 1988 Outlook - Fourth Quarter And 1987 Synopsis

Real gross national product3 (GNP) grew at a seasonally adjusted annual rate of 4.2% in the fourth quarter compared with a revised 4.3% rate in the third quarter, according to the most recent estimates released by the U.S. Department of Commerce (table 1). Expanding inventories, Government purchases of goods and services, residential fixed investment, and a narrowing of the trade deficit fueled the growth. Significantly reduced consumer demand led to the heavy inventory growth. Almost half of the buildup in inventories consisted of automobiles because consumers reduced purchases when Detroit ceased most incentive programs in late summer. Reduced consumer demand also affected imports, however, and the narrowing of the trade deficit resumed after widening in the third quarter. Nonresi- [ ] dential fixed investment also declined after a strong gain in the third quarter. On a year-to-year basis, the economy grew at an inflation-adjusted rate of 2.9%, the same as that of 1986. However, on a fourth-quarter-to-fourth-quarter basis, the real growth reached 3.8%, the highest growth since 19M, and exceeded the Reagan Administration's estimate of 3.4%. Rising merchandise exports accounted for about one-third of the growth in GNP for all of 1987 and are expected to continue to grow as domestic manufactures benefit from the lower value of the dollar vis-a-vis other major trading country currencies. Consumer demand became a less important factor of economic growth, but employment continued to grow (table 2), and civilian unemployment declined by 0.9 percentage points (December to December) as the industrial sector geared up to increase exports. Inflation, as measured by the fixed-weighted GNP price index, remained low at 3.4%.