U.S. Economy Continues Its Swift Growth

WASHINGTON — Like a runner who refuses to slow the pace in a grueling marathon, the U.S. economy has streaked into 1999 swifter and more powerful than most experts ever expected, undermining prospects for lower interest rates and prompting analysts to toss out forecasts that had called for a sharp decline in growth.

New reports on factories, retail spending and unemployment claims Thursday provided the latest pieces in a picture of striking economic vitality. The bullish statistics come less than a week after the government said the economy stormed ahead at an unexpectedly robust pace in late 1998 and further show that the United States remains remarkably unscathed by financial upheavals around the world.

Most forecasters expect the hard-charging economy to take a breather in the months ahead. But increasingly, they predict the respite will be more modest than many had foreseen until recently--and some concede the case for any slowdown is getting hard to make, given the broad assortment of evidence that points to strength rather than weakness.

“There just doesn’t seem to be anything out there that’s going to slow the economy down,” said Cynthia Latta, principal U.S. economist at Standard & Poor’s DRI, one of a growing number of forecasting firms that is revising upward its expectations for the economy this year. Latta and her colleagues expect the economy to grow at a robust 3.4% in 1999, the fourth straight year of growth above 3%.

At Bank of America, analysts also have been recalculating their projections in light of the economy’s heated performance in late 1998.

“Like everyone else, we’ve been too cautious up to now,” said Peter E. Kretzmer, senior economist with Bank of America in New York. “The growth has surprised us too.” He is predicting a 3% expansion this year, rather than the more lackluster pace he had earlier expected.

As recently as last fall, the consensus among forecasters was that growth this year would fade into a tepid 2% range. They said a combination of less confident consumers--troubled by headline-making layoffs--a weaker stock market and reduced business investment would siphon energy from an economy that grew at about 3.9% in 1998. Overseas woes, which hammered U.S. manufacturing last year, were expected to take a growing toll on the economy overall. But the economy jumped an unexpectedly strong 5.6% in the last quarter.

And Thursday, fresh statistics suggested that even manufacturing has entered 1999 roaring with life. Consumers, the heart of the economic resilience, are plunging relentlessly ahead.

Factory orders in December staged the sharpest rally in 13 months, with a 2.3% increase reflecting brisk demand across a range of industries. Beyond that, major retailers Thursday reported that Americans did more post-Christmas shopping in January than had been expected, with same-store sales--sales at stores open at least a year--posting an 8.3% gain, the largest since April.

On top of that, the Labor Department said first-time claims for unemployment slipped to a six-week low of 292,000, surprising analysts who view that figure as an early hint of conditions in the labor market.

“It looked for a while that [jobless claims] might be on the rise,” said DRI’s Latta. “That’s a very low level.”

Since late last year, some economists have been rewriting their forecasts for 1999. But last week’s report of the economy’s stunning 5.6% growth rate between October and December was the sort of event that prompted many to take a fresh look at the economy.

Although it was known that 1998 finished strongly, many were still impressed that the last quarter was so muscular, coming just months after global financial chaos had prompted the Federal Reserve to begin a regimen of interest rate cuts and had briefly sent Wall Street into a tailspin.

“The performance last year--in spite of everything, the stock market calamity, Asia falling apart, political trials and tribulations that the nation was put through--was so good, so broad-based, it tells you there’s a real resilience in the U.S. economy,” said Joel L. Naroff, chief bank economist with First Union Corp. in Philadelphia. “It will take an awful major shock to knock it off its feet. It’s really in good shape right now.”

On Wednesday, the Fed’s policy-setting committee concluded a two-day meeting, deciding to leave short-term interest rates where they are for now. But the economy’s unexpected strength has stirred Wall Street, where expectations that the Fed would further reduce rates during 1999 are suddenly competing with questions of whether the Fed will raise them later this year.

Longer-term rates already are on the rise. For example, 30-year Treasury bonds, which had yielded as little as 4.8% during the depths of financial anxiety last fall, have crept up to the 5.3% range. “They’re reflecting the strength of the U.S. economy--and as a result, consumers and businesses are beginning to pay more for credit,” said Kretzmer of Bank of America.

Certainly, reasons for doubt are not hard to find. Many wonder whether an overvalued stock market is fueling a speculative boom in this country, with the strong growth figures masking an underlying vulnerability that may become painfully clear in the future.

The stock market and its impact on spending “does raise the issue of uncertainty,” Naroff said. “It does raise questions about where we’re going to go from here.”

A major financial spasm overseas, once again sparking turmoil in global markets, remains a possible danger. But some analysts also point out that Brazil’s recent struggle with a plunging currency has not spread turmoil worldwide, and has had little lasting effect on Wall Street. Western Europe’s economy, meanwhile, has slowed but doesn’t appear threatened by recession. To guard against that possibility, the Bank of England on Thursday cut its key short-term interest rate from 6% to 5.5%.

For his part, Naroff recently upgraded his U.S. growth projections for this year to 3.2% from 2.6%. “Barring some major foreign crisis, there seems to be little [reason] for me to argue that the economy will slow down,” he said.

* SHOPPING SPREE: Retailers post gains. C1