WASHINGTON -- Bond market worries that Federal Reserve officials will move soon to tighten credit subsided Friday after the government reported that consumer spending slowed while businesses piled up inventories in the second quarter.
The Commerce Department's advance estimate for gross domestic product showed growth of 3.7%, which was in line with expectations. Inflation measures remained tame, with the fixed-weight price measures and the implicit price deflator both up 2.9%.
Analysts said the report suggested that the economy is losing some steam and the Fed will not be forced to take an aggressive tack on interest rates. "The possibility of a Fed tightening is diminishing," said Mickey Levy, chief financial economist for NationsBank. "The market's perception is that the Fed may be on hold."
Interest rates fell across the board in reaction to the GDP report, with the yield on the Treasury 30-year bond tumbling to 7.40% from a close of 7.54% on Thursday. Rates on twoyear and five-year notes were also sharply lower.
Members of the Federal Open Market Committee are scheduled to meet Aug. 16 to review rate policy. Before the GDP report, analysts were generally confident that officials would raise short-term rates at the meeting. "Now it's a toss-up," said Levy.
In his recent testimony to Congress, Fed chairman Alan Greenspan said it was "an open question" whether policymakers will opt to tighten credit further. At the time, his comment was widely read as indicating a willingness to raise rates.
'Maybe some of us misread him," said James Coons, chief economist for Huntington National Bank in Columbus. "It looks like the economy is slowing and there's still no inflation upturn. I think that argues for continued patience."
Normally, economists consider a growth rate of 3.7% too fast. Moreover, annual benchmark revisions to earlier figures showed GDP growth of 3.3% in the first quarter and 6.3% in the fourth quarter of 1993.
But the Commerce figures showed that swelling business inventories added $28.6 billion to GDP growth in the second quarter, the largest contribution since the July-September period of 1991. Much of the buildup in inventories was concentrated among retailers and wholesalers, analysts said.
Personal spending, which accounts for two-thirds of GDP, rose only 1.2% to mark the smallest gain since the end of 1991. Spending on automobiles and other durable goods was up a meager 0.8% after soaring 8.8% in the first quarter.
Real final sales, which measures demand excluding the change in inventories, rose a modest 1.5% after gaining 2.2% in the first quarter.
Clinton Administration officials hailed the GDP report as more evidence that the president's economic policies are working. "The U.S. economy continues to turn in a fine performance," said Laura D'Andrea Tyson, head of the president's Council of Economic Advisers, who briefed reporters along with Commerce Secretary Ronald Brown.
"So far, everything we have seen in 1994 confirms our forecast of a sustainable, investment-led expansion with low inflation," Tyson said.
According to the Commerce Department report, business fixed investment jumped 10%, continuing a string of double-digit gains since the beginning of 1992 when Clinton took office. Residential investment also stayed healthy with a gain of 10%.
Tyson said she does not believe the bulge in inventories signaled a major slowdown in the consumer sector, given "very high" consumer confidence levels and the big run-up in orders for non-defense capital goods in June reported earlier last week by the Commerce Department. She also noted that inventories remained lean compared with levels often seen in the past.
Consumer confidence has edged down recently. The confidence index prepared by the University of Michigan for July edged down to 89.0 from 91.2. The Conference Board's index, released earlier last month, was also down.
But private analysts said it was too early to tell what is going on with inventories, a point made by Greenspan in his testimony to Congress. A rise in inventories can signal either a slowing in consumer spending and cutbacks in production, or it can be a deliberate effort by businesses to put more goods on their shelves to meet future demand.
In any case, analysts did not seem to think the issue was a problem for now. They said that some of the slowdown in consumer spending on autos reflected the inability of dealers to supply popular models. As a result, spending and auto production are expected to add once again to growth in the fall.
