Third-Quarter National Economic Activity And Fourth-Quarter Outlook - Third-Quarter 1988

Real gross national product (GNP) grew at a seasonally adjusted annual rate of 2.2% in the third quarter, down from a revised 3.0% in the second quarter, according to preliminary data from the U.S. Department of Commerce (table 1). The slowdown in the rate of growth was attributed to the summer drought, a larger trade deficit, and a decline in Federal spending for defense. Exports slowed from the second quarter, as the dollar, compared with other industrial country currencies, edged up. Imports of both consumer goods and capital goods rose sharply, with consumers buying more foreign cars, computers, and electrical machinery. Although net exports of goods and services deteriorated slightly from the second quarter, the U.S. trade position continues to be much improved from 1987 and first quarter, 1988. Business spending for new plant and equipment rose at a 4.6% pace, well below that recorded earlier in the year. The 3.5% increase in consumer expenditure was accounted for mainly by nondurable goods and services; expenditure for durable goods--those products lasting more than 3 years--rose only 0.4%. Inflation, as measured by the fixed-weighted GNP price index, rose at an annual rate of 4.9% in the third quarter. Prices rose slightly less than they had in the second quarter, when inflation reached a 6-year high. In September, 1988, the President signed a U.S.-Canada free trade agreement (FTA) which will eliminate all tariffs and most nontariff barriers between the two countries by 1999, thereby creating the world's largest open market. In 1987, U.S.-Canadian bilateral trade totaled $161 billion. The expansion of trade is expected to generate 5% higher growth for Canada and up to 1 % higher growth for the United States by the end of the century. The higher growth for the United States translates into an estimated 750,000 jobs, and $2.4 billion in exports. Canadian parliamentary approval of the agreement is still required before the treaty can take effect. The debate in Parliament is continuing, and the issue is not expected to be resolved until after the November 21 election.