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GNP fails to ease fears of recession

The U.S. economy grew at a faster-than-expected 1.8 percent rate in the third quarter, the government said Tuesday, but the report failed to dissuade many analysts who believe the economy is entering a recession. The Commerce Department report on the gross national product showed that consumers buying cars and other items had continued to drive the longest peacetime economic expansion in U.S. history through September. Whether the expansion reaches its eighth anniversary in November was a matter of debate.

"This release contradicts those who believe we are in a recession or are about to enter one," Commerce Undersecretary Michael R. Darby told reporters. His boss, Commerce Secretary Robert Mosbacher, added in San Antonio, "I hope all the doom-sayers and nay-sayers and cluck-cluckers go back in their holes for a while."

But economist Bruce Steinberg of Merrill Lynch Capital Markets in New York said, "I believe we're in a recession. I think that most of the things showing strength in the third quarter will be weak in the fourth, particularly consumer spending."

Robert G. Dederick, chief economist for Northern Trust Co. in Chicago, also believes the economy is declining this quarter. He contended that much of the GNP strength "was concentrated early in the (third) quarter. It is by no means certain that it was growing 1.8 when the quarter ended."

Indeed, Michael Boskin, chairman of President Bush's Council of Economic Advisers, said, "While this is pleasant news about the third quarter, we are concerned about a sluggish fourth quarter and the early part of 1991."

He added that he "is certainly pleased" with the Federal Reserve's action Monday in pushing down a key short-term interest rate, a move that might be expected to boost economic growth.

The gross national product report will be revised twice in the next two months as more information is received. The final revision of the second-quarter GNP showed the economy grew just 0.4 percent rather than the 1.2 percent first reported.

Consumer spending _ two-thirds of the nation's economic activity _ jumped 3.6 percent in the third quarter compared to a 0.2 percent gain in the second. Much of the advance was due to a $3.4-billion increase in automobile sales, which had declined $6.1-billion from April through June.

But the Conference Board reported Friday that consumer confidence in the economy plunged in October to the lowest level since the 1981-82 recession. The New York research group said its index tumbled more than 24 points, the biggest one-month drop in the 20-year history of the survey.

"The fourth quarter is going to be sick," said Roger Brinner, chief economist at DRI-McGraw-Hill in Lexington, Mass. "The consumer is terrified about the future."

In addition to consumer spending, the department said third-quarter economic growth was fueled by a 7.4 percent increase in business investment.

That activity was partly offset by a $1.7-billion decline in inventories held by business and a $7.9-billion merchandise trade deficit.

Housing construction was off 15.4 percent, and federal government spending was down 0.3 percent.

The third-quarter growth was an improvement over the meager 0.4 percent gain during the second quarter when consumer spending inched up just 0.2 percent.

Brinner said consumer spending was weak in the second quarter because it was stronger than normal in the first quarter due to unusually warm weather.

"If you take spending out of the second quarter and put it into the first, obviously it depresses second quarter and makes the third quarter look good," he said.

Total GNP, the most broad-based measure of the nation's economic activity, reached an annual rate of $4.17-trillion in the third quarter when adjusted for inflation. That was a gain of $18.5-billion over the rate for the second quarter.