The Economy In The First Quarter, 1988 - Overview

Against the receding background of the October stock market crash and the December overhang of inventories, the economy began with a shaky start in 1988. As 1988 began, the Administration's estimate of real growth for 1988 had just been reduced from 3.5% to 2.4% and economists and other ob-servers were concerned that the expansion that was 5 years old might be near the end and that a recession might be around the corner. The ensuing moderately strong economic activity, however, belied all the negative signals that were evident earlier, and the real GNP continued to grow at an estimated 2.3% annual rate during the first quarter of 1988, extending the ongoing recovery into the sixth year (table 1.). The relatively accommodative policy of the Federal Reserve Board (the discount rate was cut by 0.25% in January), a strong performance by the export sector, and the revival of consumer spending were major forces underlying the economic strength. But as the quarter drew to a close, signs of tight capacity utilizations were apparent in many of the export and capital goods sectors, including textile, chemical, plastic, metal, and machinery. Employment was at a record high level while the unemployment rate was close to a historical low. Prices were rising at a faster pace than those of 1987, and the dollar resumed its slide after a brief recovery in January and February. These factors gave rise to the fears of higher inflation. Long-term interest rates increased, casting a pall over the prospect of a robust growth for the rest of the year.