THE WHITE HOUSE Office of the Press Secretary _____________________________________________________________________ For Immediate Release April 28, 1994 PRESS BRIEFING BY DR. LAURA TYSON, CHAIR OF THE COUNCIL OF ECONOMIC ADVISERS The Briefing Room 10:12 A.M. EDT MS. MYERS: Dr. Tyson will brief on today's growth figures, and there will be a -- the Press Secretary will be back to brief at 2:00 p.m.. So without -- Q Who will be back -- MS. MYERS: The Press Secretary. I often speak of myself in the third person. (Laughter.) It's something I learned from, you know -- Q AP reporter. MS. MYERS: That's right, exactly. So, Dr. Tyson. DR. TYSON: Thank you. Good morning. I have a written report which I'll read from, which will be available, and then I'm happy to answer questions. This is a discussion of the advanced report on Gross Domestic Product for the first quarter of 1994. The report confirms that the underlying fundamentals of the economy are sound, taking into account special factors that have caused the quarterly GDP numbers to bounce around a bit. The evidence indicates that growth continues to be solid, and inflation continues to be modest. In addition, the report shows that strength in private sector spending is the driving force behind the economy's expansion. Federal government spending continues to decline as a result of the administration's deficit reduction plan. Overall, today's report should calm fears that the economy is growing at an unsustainably rapid rate, or fears that inflation is about to spike upwards. The numbers indicate the economy remains on track for growth of about 3 percent this year; creation of about 2 million new jobs this year; and an inflation rate of about 3 percent for the year. Those are what we forecast for the year, and we believe that the first quarter numbers are consistent with that forecast. Now, I can give you some more detailed background. The advanced estimate for GDP indicates output increased at an annual rate of 2.6 percent in the first quarter. Private sector spending increased at an annual rate of 4.6 percent, led by private spending on producer durable equipment, housing, consumer durables. Those components of private sector spending increased at an annual rate of slightly over 11 percent. In contrast, government spending declined by 6.2 percent and was really pulled down by a very sharp decline in federal spending, particularly national defense spending. Again, that's in accordance with the administration's budget plan. So we have first quarter results showing a continued switch in spending to more private sector spending and less government spending. As we had expected, the severe weather did dampen growth somewhat, appearing to depress weather-sensitive spending on structures investment in both the public sector by governments and in the private sector as well. Another indicator of the economy's growth is real final sales -- that's output growth minus inventory change. This also slowed in the first quarter, growing at an annual rate of only 0.9 percent compared to an annual rate of 6.8 percent in the last quarter of 1993. Now again, what I want to try to point out is that we believe there were special factors that play which cause the fourth quarter growth rate of last year to be unsustainably high. And there were some special factors that played this quarter which have dampened the growth rate somewhat. During the first quarter of last -- excuse me -- during the last quarter of last year, the special factors causing the growth rate to move up to 7 percent were rebounds from the summer floods; unexpectedly large export growth at 20 percent, not a number which we believe would be sustainable; and a strong production upsurge in auto assembly lines in the fourth quarter of last year making up for some production difficulties the auto industry had had in the third quarter. So those are the special factors for the fourth quarter of last year which helped lift the growth rate to 7 percent, which we did not believe to be sustainable. The special factors in the first quarter of this year, which have caused growth to come down slightly below 3 percent, were, of course, the bad weather, which I already mentioned, and an unexpectedly sharp drop in exports. The export numbers, if you look at the fourth quarter of last year and the first quarter of this year, you have an unsustainably large increase in the fourth quarter of last year, and a correction -- a large correction in this quarter. And then finally, another factor slowing growth in the first quarter of this year was really an unsustainably large fall in federal spending. We anticipate federal spending will continue to be a negative number, but this is a very large negative number, and we expect the negative to become smaller over time. If you average growth rates across the last quarter of last year and the first quarter of this year to smooth for the effects of all the special factors, you get a growth rate of 4.8 percent for real GDP and 3.9 percent for real final sales, which -- and I think looking at averages over quarters, which bounce around like this -- is a little more telling of what the economy is actually doing than any one quarter's numbers. Finally, the inflation rate as measured by the GDP Fixed Rate Price Index increased to a 2.9 percent annual rate in the first quarter of this year. That is still less than the 3.1 percent rate for 1993, and the 3.3 percent for 1992, and is consistent with our forecast of about a 3 percent growth in inflation this year -- 3 percent inflation rate this year. Finally, having giving you all those details, let me emphasize that this is an advance estimate. It will be revised twice over the next two months, and sometimes these revisions are quite substantial. So that's to be kept in mind in any analysis of what this tells us about the economy. Q Forty-four legislators sent a letter to the Fed saying the enough is enough on the interest rate increases. They sent this letter on Tuesday. When the G-7 met here last weekend, they were concerned about the interest rate increases in the United States, and the impact it had on international bond rates. And then obviously today we get this, a little bit slower than expected first quarter growth rate, which some people had said could be as high as four percent. Does it look to you that we are now entering the period where interest rate increases, no matter what the origin, whether it's market or Fed, now becomes potentially negative to the outlook? DR. TYSON: I think it's really too early to tell. I think the reason it's too early to tell is basically, first of all, there are a number of special factors that play here; and if you look at the average growth over the two quarters, you have an economy which appears to be growing quite strongly. And in an economy which is growing quite strongly one might anticipate, and one has seen evidence of, the increase in the use of and demand for credit, which would cause some increase in interest rates. So to the extent that when you look through the special factors, you see an economy with solid growth, with continued expansion and with demand for credit, somewhat higher interest rates would be consistent with that kind of economy. I think it's really too early to draw the conclusions that have been drawn, as you suggest. Q Also, you mentioned the fact that we've had a cutback in export activity. Do you see that as a result of the strengthening of the dollar in relation to the economy growing, or does the dollar play a major factor in the export outlook here? DR. TYSON: I think that it's best to sort of look at the longer-term trend in exports. Over the past four quarters, export growth in the United States has been about 2.9 percent, nearly 3 percent. We still look very price-competitive internationally. The dollar has been, over the past 12 months, has not shown significant change relative to most of its trading partners. So I think that the U.S. is very competitive internationally. And one should look through this kind of very large expansion in the fourth quarter and somehow a correction in this quarter, and say bouncing -- taking -- looking through those bouncing around, it looks to be that the U.S. remains competitive. And, of course, we hope to benefit later this year from predicted strengthening in other parts of the global economy, which the IMF and the OECD and others have predicted that other parts of the world economy, and particularly the industrial economies that we trade with heavily, will be picking up growth somewhat. That should actually help our export performance. Q Dr. Tyson, could you elaborate on why this preliminary report should ease inflationary and interest rates concerns? DR. TYSON: Once again, it depends on -- what I said -- what I would say the report should do, is anyone who was concerned that the economy was growing at an unsustainably high rate, anyone who took that 7 percent and tried to extrapolate it forward, I think these numbers now suggest that the economy is growing in a more sustainable range. Anyone who is concerned that inflation was about to spike up, looking at this report or the other reports that have come out on prices in the last month or two, suggest that in fact the numbers suggest, and inflation rate, which is basically not changing, or perhaps as we have predicted over the course of the year, will show some uptick. But the concern about a sudden spike in inflation, I think, were exaggerated. And now the numbers, I think, will confirm that. So those were the kinds of pieces -- the evidence that we looked at in these reports. Q Dr. Tyson, in your opening statement you said that the figures should allay fears that the economy is overheating; but then you say if you average the two quarters, you're getting growth in the range of 4 to 5 percent GDP, which I think even you would admit is overheating. Most economists consider sustainable long-term growth be no more than 3 percent. So what is it? Are we in a moderate pace below 3 percent growth, or are we in that higher range -- DR. TYSON: I think we are in a range -- averaging does some smoothing. It doesn't take away the -- all of the effects. The last quarter of last year was extremely strong. This quarter is actually quite -- reasonably close to the 3 percent that we predicted. So I think that -- when I look at the numbers, I say that the fourth quarter of last year was really the outlier quarter; and that the evidence from this quarter, once you do some corrections for weather and for a decline in federal spending, which is likely to not be as extreme over the next several quarters, we conclude that around 3 percent is where the economy is. So in that sense we don't see evidence that the economy's overheating. The other thing I want to say is that it's important to distinguish between the long run capacity growth rate of the economy and where the economy is at a moment in time. We still have in this economy a significant number of unemployed people. We still have in this economy levels of capacity utilization, which we believe there's room for increases, so that the economy is capable for some quarters of growing faster than its long run potential; and then gradually, if policy is -- if policy is done correctly, this is what we're trying to do, and this is what I believe the monetary authorities are trying to do, you get the economy to gradually glide into or slow down to its long run capacity growth. But for some quarters it can be above that growth rate. Q So how would you evaluate then, in overall terms, the actions by the Fed to raise rates? Is it a policy that's working, or is it backfiring, or what's -- DR. TYSON: I will say what I have said numerous times -- the Federal Reserve -- the administration does not endorse or criticize the Federal Reserve policy. The Federal Reserve has made decisions based on its understanding of the economy, and presumably -- our forecast always anticipated that there would be some increases in short-term rates this year, and that would be consistent with a sustained period of expansion in this economy. The numbers we see at this point are still, to our mind, consistent with the economy continuing to expand in about the 3 percent range. That's the forecast we had for the year. We are quite comfortable with that forecast given the new numbers. And, one, we anticipated some increase in short-term rates would accompany that sustained expansion of 3 percent. Q You mentioned that with the global economy, concerning exports, you were expecting that the global economy will be basically recovering by the end of this year. Now, right now in Japan they're having political stalemate and et cetera. Are you redoing your forecast to possibly consider that Japan will not start a recovery this year? DR. TYSON: We have not redone our forecast yet. And I would say that the global predictions of growth and growth improvements in the world economy have always predicted a rather slow turnaround in -- through the world. So this is a growth -- the prediction is for growth improvement but at a very moderate pace. And, indeed, the greatest uncertainty in the global forecast concern the pace at which Japan will turn around. So in some sense that's already built into the forecast we're working with. Q To what extent is the uptrend -- you're riding the normal working of the business cycle, and to what extent is it policy -- DR. TYSON: Well, look, I would say that the -- there are some important facts about policy which show themselves clearly in this report. The first fact about policy is that we intended and the American people wanted a deficit reduction plan which would cause a shift in the composition of spending towards the private sector and away from the government sector. And that is happening and it continues to happen. And I think that that is a reflection of policy choices. The major component of federal spending that's declining in this report is national defense spending. But all components of federal spending are coming down. And at the same time, those parts of private sector spending which are most sensitive to the availability of credit, namely durable spending by businesses, consumer spending on durables and residential construction. Those private sector spending categories are the categories that are the driving force behind the expansion. So the whole notion of increasing the availability funds to the private sector and generating more growth there to substitute for growth in the public sector, that's occurring, and that is a policy development. The second thing I would want to say, as we also said all along that it was very important to have a pace of deficit reduction which was not so rapid as to cause the economy to slow down too dramatically. And what these numbers show once again is that in a given quarter a cut in government spending is a contractionary influence on the economy. One of the reasons the number is 2.6 percent and not 3.6 percent is because government spending was a -- fell dramatically in this first quarter. Now, that shows that a contraction in government spending has a slowing effect on the economy in the short run. We want to bring government spending down gradually, having the private sector make up or more than make up the difference. So the government contracts the economy by cutting down its own demand; the private sector more than offsets that by increasing its demand. If you try to cut the deficit too fast, you can easily undermine the pace of expansion in the short run. And that's another thing that this report shows clearly. THE PRESS: Thank you. END10:28 A.M. EDT