US on schedule for soft landing

Growth slackened more sharply than expected in the US in the first three months of 1995, putting the economy on schedule for the soft landing planned by the Federal Reserve, the US central bank.

The slowdown makes even less likely the rise in interest rates to prop up the dollar which Michel Camdessus, managing director of the International Monetary Fund, called for before this week's G7 meeting of finance ministers and central bank governors. The view on Wall Street is increasingly that interest rates will remain on hold for the rest of the year.

US gross domestic product grew in real terms at an annualised rate of 2.8 per cent in the first quarter of the year, somewhat below market expectations of 3.1 per cent, according to preliminary estimates released yesterday by the US Commerce Department. This represented a marked deceleration from the stormy rates of 4 per cent and 5.1 per cent chalked up in the last two quarters of 1994.

The Mexican crisis took its toll on the economy with exports falling, compared with growth of 20 per cent in the last quarter. However, Ian Borsook, economist at Merrill Lynch in New York, thinks that has got "the worst out of the way". If that is the case, there should be a rebound in exports in the rest of the year on the back of a super-competitive dollar against European countries and Japan.

With fixed business investment continuing to grow strongly, that might seem to undermine the soft landing scenario. Capital spending expanded by 19 per cent, faster even than in the last quarter of 1994. But investment tends to lag the economic cycle and there were more fundamental signs of weakness in the economy.

Housing investment declined by 7 per cent. And consumer spending increased by only 1.4 per cent in the first quarter as consumers cut back on purchases of durable goods. But at the same time there was an unexpectedly big build- up in inventories, which rose by $63bn (£39bn).

This suggests that much of the increase in stocks was involuntary: Ian Borsook's estimate is 30-40 per cent. Most of this is concentrated among retail and wholesale inventories. However, as retailers and wholesalers seek to cut back, this will put manufacturers under pressure to cut production in the months to come.

One indicator used to monitor the state of manufacturing is the Chicago purchasing managers index.

This had been expected to show a flat manufacturing economy. In the event it rose in April to 58 per cent from 55 per cent in March, suggesting that manufacturing is still expanding for the time being.