A Glimpse of the 1995 Economy

Sanjay Paul
August 1995

A version of this article appeared as Economy's not so bleak if you look at the signs in Business Forum, Green Bay Press-Gazette, August 5, 1995.

Is the economy slowing down?

According to some recent data on the U.S. economy, the answer is Yes. Consider the figures for gross domestic product (GDP), the country's output of goods and services. In the second quarter of 1995, GDP grew at an anemic annual rate of 0.5%.

Why has the economy slowed down? And, should this be cause for concern?

Last year, as the economy chugged along robustly, fears of incipient inflation began to rear their heads. The Federal Reserve System (the Fed) didn't tarry - they moved quickly to dampen inflationary pressures. And so interest rates went up.

The Fed raised interest rates in order to restrain spending. The line of reasoning was this: Higher costs of borrowing would discourage consumers from buying homes and cars. This decrease in consumer spending would cause businesses to slow the frenetic pace at which they were producing goods. The economy would then grow at a more modest pace - at around 2.5%, the Fed hoped.

The policy seems to have worked. In the first quarter of 1995, the growth rate of GDP was 2.7%. Higher interest rates had done their work - the housing and automobile sectors experienced a decline early in the year. Inflation also appeared to be under control.

The second quarter's performance appears to be more worrisome. A growth rate of 0.5% would imply that the economy had almost stalled. Analysts worried about the prospects of declining job growth: If businesses are not producing more, why would they hire more workers?

But is the picture really so bleak? The 0.5% growth rate translates into a roughly $30 billion increase in GDP - not exactly chicken feed. Moreover, other signs point to an improvement in the economy in the third quarter. Among other things, consumer confidence has risen, inflation continues to be under control, long-term interest rates are low and the stock market continues to climb.

It is inevitable in the course of economic growth that a country's output of goods and services will rise and fall in the short run. This variability in GDP - the business cycle, as it is called - afflicts every country. To get a better picture of the strength of an economy, one must look at longer intervals; a single quarter's data alone could be quite misleading.

Back to Articles