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State of the economy? Growth, low inflation

The economy is on its way to its best yearly performance in a decade.

The Commerce Department reported Friday that the economy grew at a solid 3.4-percent pace in the three months from July through September.

The rate of growth was slower than the 4.1-percent rate in the spring, but easily exceeded economists' expectations.

Wall Street greeted the news with enthusiasm.

The Dow Jones Industrial Average surged 55.51 to 3930.66, enjoying its biggest daily rise since a 61.2-point jump on Oct.

11. The yield on the Treasury's key 30-year bond fell to 7.95 percent, another sign of confidence.

Investors and traders were reassured because the report also contained a modest inflation figure _ an annual rate of just 2.7 percent during the quarter _ measuring prices paid by businesses as well as consumers.

"You couldn't ask for a better combination of numbers than we got today," said Son Wong Sohn, chief economist at Norwest Bank in Minneapolis. "First, the economy is growing 3.4 percent, faster than anticipated . . . and the market is looking at the inflation number and thinking that its inflation concerns have been overdone."

The combination of moderate growth and mild inflation suggests the expansion can be sustained with only modest adjustments in interest rates to keep prices in check.

Many analysts expect the Federal Reserve Board to do just that.

Short-term interest rates are expected to rise _ probably by a half-percentage point _ when the central bank's policy makers meet Nov. 15.

"The economy is not overheating," said Robert Barr, deputy chief economist for the U.S. Chamber of Commerce. "We think the Federal Reserve wants to err on the side of having less growth and less inflation _ that's why they are probably going to raise rates at the next meeting."

The economic recovery is more than 3{ years old and has surprised many by its resilience in the face of five interest-rate increases by the Federal Reserve since February.

There was more good news.

The budget deficit fell to $203.4-billion this year, in what administration officials said is more evidence of the economy's strength.

"Every measure coming in says the economy is on the right track," Treasury Secretary Lloyd Bentsen said.

The budget deficit was $255-billion in fiscal 1993. The administration predicts the deficit will drop to below $170-billion in the current fiscal year.

Private economists have said the declining deficit is due in part to the improving economy and to spending caps enacted in 1990 and 1993.

The economy's expansion was driven largely by enthusiastic consumer spending. Consumer outlays rose a hefty $26.1-billion during the quarter ended Sept. 30, compared with $11.5-billion in the prior quarter.

The brisk demand for products during the summer also generated a boost in business inventories, as companies expanded output to meet a surge in orders. For example, production of some popular car models and home computers has been unable to keep pace with demand.

Business investments in new equipment and machinery also continued growing at a rapid rate during the quarter.

Dun & Bradstreet reported Friday that business failures eased 10 percent in the first nine months of 1994 to 54,669 from 67,498 in the same 1993 period.

The Clinton administration, which has gained little public credit for the robust economy, exulted in the report, which provided timely ammunition for Democrats in the midterm elections Nov.


"It's the best of all possible worlds," said Vice President Al Gore, who appeared in the White House briefing room between campaign swings to trumpet the economic growth.

But Republicans, hoping to make significant gains in congressional seats, said that Clinton's policies will translate into weaker growth in coming months.

"What we're trying to point out is that we're at a crossroads," said Rep. Jim Saxton, R-N.J. "We think we are headed in the wrong direction."

President Clinton, visiting U.S. troops in Kuwait, was undaunted.

"We had good news from the home front today. I'm very, very encouraged by this," he said. "We have growth, better jobs. Low inflation."

_ Information from the Washington Post, Los Angeles Times, New York Times and Associated Press was used in this report.