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Economy surges; markets falter

The economy showed more strength in the last three months of 1993 than it has in nearly 10 years, helping to renew inflation jitters that the Clinton administration tried to calm.

The gross domestic product rose at a torrid 7.5 percent rate during the final quarter last year, the Commerce Department reported Tuesday as it revised its own 5.9 percent estimate of a month ago.

The recent slide in stock prices accelerated with the news. The Dow Jones industrial average had lost nearly 42 points by midafternoon but recovered somewhat. The Dow closed down 22.79 to 3809.23.

Bond prices also crumbled, pushing up credit market interest rates even farther. Bond investors dislike inflation, which erodes the value of fixed-income securities.

The government's latest measure of the nation's total output of goods and services easily exceeded the projection of most economists and was the best performance since a 7.9 percent advance in the first three months of 1984.

"The economy looks terrific, maybe too good," said Allen Sinai, economist with Lehman Brothers in New York City. "More quickly than expected, the gap between demand and supply is being wiped out, setting up the potential for higher inflation."

But President Clinton said there is little reason to fear the economy is overheating.

"What we've got to try to do is to keep working to bring the deficit down, to keep interest rates down . . . to try to keep the economy going to have more investment so we can create more jobs," he said.

Contributing to inflation concerns, a survey of purchasing managers showed manufacturing prices rose more rapidly in February than in over three years. Manufacturing output expanded for the sixth straight month.

Analysts said the Federal Reserve Board, which nudged short-term interest rates from 3 percent to 3\ percent a month ago, probably will push them up another quarter point soon _ perhaps this week.

But many economists said growth already is slowing this year, held back by harsh winter weather in much of the nation and the Los Angeles earthquake.

Providing fresh evidence Tuesday that the pace is slackening, the National Association of Realtors said sales of existing homes fell 3 percent in January because of the weather and rising mortgage rates.

In another report, the Commerce Department said construction spending slipped in January by 1.2 percent, the first decline in nine months.

The fourth-quarter GDP surge was fueled largely by a consumer spending spree encouraged by low interest rates, and a better-than-expected rise in exports that is not likely to be duplicated soon.

Cynthia Latta, an economist at DRI-McGraw Hill in Lexington, Mass., predicted consumers will pull back because workers' incomes are rising only moderately.

"We just don't think the buying power is out there," she said. "The savings rate is nearly at a record low."

The administration and many private economists continue to predict moderate growth this year of around 3 percent to 3.5 percent and a similar rise in inflation, only slightly worse than last year's 2.7 percent jump in the cost of living.

Despite jitters on Wall Street and in the bond markets, the latest government reports show inflation in check.

An inflation index tied to the GDP rose at an annual rate of 1.3 percent in the fourth quarter, the smallest gain since 1 percent in the summer of 1992.

The government said GDP grew at an annual rate of $93.8-billion in the final three months last year, $20-billion more than estimated a month ago.

Exports shot up at a 20.5 percent annual rate, outpacing a 16.2 percent gain in imports. But analysts expect weaker American sales abroad this year.

There was a $4.7-billion increase in consumer spending, which expanded at an annual rate of 4.6 percent, the best showing in a year. Consumer spending accounts for two-thirds of total economic activity.

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