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Office of the Press Secretary

For Immediate Release March 1, 1994
                         BACKGROUND BRIEFING

March 1, 1994

The Briefing Room

10:52 A.M. EST

SENIOR ADMINISTRATION OFFICIAL: I am just here to answer some questions on BACKGROUND about the economy. This was a -- we had two pieces of economic news today. One was a sharper than anticipated revision in the GDP growth rate in the fourth quarter of 1993. This was largely due to a -- more than half of the revision upward was due to a much stronger than expected performance on net exports, particularly on exports, which increased 20.5 percent at an annual rate.

All the growth in the fourth quarter was in the private economy. And inflation in the fourth quarter -- the revision showed the inflation estimate largely unchanged.

We also had from the information today from the National Association of Purchasing Management, which shows that economic growth is strong but perhaps easing somewhat. The background part of this is simply to say that we have a forecast for this year we feel quite comfortable with; that numbers for any given quarter can often be quite volatile. But if you look at the pattern in the economy over last year, when you look at this revision and put the revision into the numbers, you have an economy growing in the neighborhood of 3 percent. We believe the economy will continue to grow this year in the neighborhood of 3 percent.

We predict a slight increase in the rate of inflation, the CPI rate of inflation last year, 2.7 to this year, 3.0. That's consistent with some of the numbers we're now seeing showing, for example, an increase in the percentage of purchasing managers who are reporting increases in prices. But we see no reason to change the forecast that we have for this year. We did end up with a higher level of output last year than we anticipated. So all of this growth in 1994 that we anticipate starts off from an improved level of output because the year ended slightly stronger than we anticipated.

So I'd like to stop with that as a sort of a general overview statement and see if there -- do you want to add something?

SENIOR ADMINISTRATION OFFICIAL: Okay. I'd just add a comment to my colleague's learned discourse.

We were talking about this -- what does it mean? And the answer, I think, is relatively simple; and that is, you can't live by monthly numbers. And if my colleague is right in a rough sort of way on her judgments of expected GDP growth and inflation, then the markets are going to react to inflation, inflation expectations, and I think you'll sort of see things continue to work in the way that we'd expected.

Markets always overreact. I traded for 26 years -- markets always overreact. So you have a monthly set of numbers this way, next month maybe you get them another way -- who the heck knows? But as I say, you can't live and die by monthly numbers, and I view this as sort of the ups and downs of what we think will be a year of very good solid growth and relatively modest inflation. Now, if you start to get a whole bunch of months in a row that are at odds with that, then you can start to rethink your position. But I sure as heck wouldn't do it based on a month or two months or even three months of numbers that aren't in accord with your longer term view.

Q Do the report figures today vindicate the Fed's tightening? Because clearly if the market participants were only looking for 7 percent growth -- the upper revision -- and it came in 7.5 percent, it looks like maybe the Fed was on more solid footing for a Fed tightening to make the administration's *.

SENIOR ADMINISTRATION OFFICIAL: The administration has taken the same position on the Fed tightening the day it happened as it would take today. So I don't think that -- I think the position that we had was the Fed is an independent agency and that we had made a forecast for this year which was consistent with the view that there would be an increase in short-term interest rates. So I don't think that this report in any way changes the administration's position on the Fed decision.

Q When you look at the NAPM price index, our vision was fairly large. I mean, we were talking from the 59.8 percent area to 67 percent. Why is it you still think that the overall inflation figure is only going to be up 2.7 percent to 3 percent? It sounds like, you know, if this would continue we'd be on a path of inflation more than 3 percent.

SENIOR ADMINISTRATION OFFICIAL: Well, first of all, I guess I would say that this is one month. Second of all, I would say, if you look at this, you have 67 percent of the purchasing managers are seeing no change in prices. It's just not enough. One months's number like this is not enough to change a forecast, particularly a forecast which allows for an increase in the rate of inflation during this year.

Q You mentioned that exports were a major factor in the upward GDP revision. The fact that the dollar is strengthening, and it continues to strengthen as the economy picks up steam, what do you anticipate for the export component of GDP? Do you see a drop off in that now?

SENIOR ADMINISTRATION OFFICIAL: Look, this export series isn't -- this export series is very volatile. And one of the things that, I think, to keep in mind about that revision in the fourth quarter is that half of it was due to the export number alone. And if you look at that export number, it was a negative in the first quarter of '93, a negative in the third quarter of '93, and then almost 21 percent in the fourth quarter of '93. I think the thing you'd say about a series like that is it is volatile on a quarterly basis.

The U.S. is in a very strong underlying competitive position right now because of big improvements in productivity over a relatively long period of time, a sustained period of time of wage moderation and corporate restructuring. I don't think there's any reason at this point that we would consider changing what is our overall growth forecast on sort of ups and downs and quarterly export performance.

Q Do you think the dollar's weakness versus the yen will actually be helpful to the export outlet?

SENIOR ADMINISTRATION OFFICIAL: I think that right now what you should say my view on the dollar is that it has -- there has been actually, over the course of the last 12 months, very little change in the dollar on a multilateral basis that is weighted by its trading partners' share of our trade. So, this is not likely to be a major factor in -- of change, nothing much has changed over that period of time.

Q Could you give us some reason why senior administration officials are unwilling to go on the record to talk about the economy?

SENIOR ADMINISTRATION OFFICIAL: This was a decision that -- look, I came here to answer questions on background about these numbers. I did not make the decision about how to have this or organize this. So, this is really not --


SENIOR ADMINISTRATION OFFICIAL: Yes, this was basically simply to explain how one might interpret sort of numbers which were -- which had come out today. One could do it one way or the other. I mean, I often hold these things in my own office and do them on the record.

Q The rationale, I think, is that the President wants to talk about it.

SENIOR ADMINISTRATION OFFICIAL: I didn't make the rationale. I can't really answer the question. I can answer questions about the economy. I can't answer questions about that.

Q You can't have her preceding the President.


Q If it's such a happy occasion, we're surprised that you're not on the record with that.

SENIOR ADMINISTRATION OFFICIAL: Hold on one second. Okay, I'm staying where I am.

Q With what you know now, are you inclined to change your view in terms of economic momentum in growth for this year in the belief that perhaps growth might be above 3 percent for the year?

SENIOR ADMINISTRATION OFFICIAL: No, we're not right now. Again, look, this is simply not enough information to change an annual forecast. We do annual forecasts, we don't do quarterly forecasts. If you looked at the quarterly pattern of growth rates last year, you will see that there are ups and downs and that the year ended up at 3.2 percent. We're saying that with ups and downs possible, likely -- that's how these quarterly numbers behave --when you look through the quarterly variations, the economy will end up this year in the range of 3 percent. And we feel very comfortable with that as a forecast.

Q Shouldn't we throw our hats up in the air?

SENIOR ADMINISTRATION OFFICIAL: You can be -- I don't want to say that, you know, if you get the best performance in a quarter that you've had in ten years with good inflation performance, I think that one should view that as good news, not bad news. It gives us a higher level of output from which to grow. So, we're better off. The economy grew more than we thought, slightly more over the year than we thought, and that gives us a higher basis on which to continue our growth. So, yes, this is good news.

Q Does it give us a higher base or do we borrow some of 1994's growth and put it --

SENIOR ADMINISTRATION OFFICIAL: We don't see it that way. If we saw it that way, we would be suggesting revising our growth forecast out; we don't see it that way.

Q You don't think there's some borrowing?


Q How does the raising of interest rates affect your forecast? Will that change it over the -- your forecast you won't change, but will it affect what you actually get in results?

SENIOR ADMINISTRATION OFFICIAL: Well, it -- first of all, what we're seeing now -- we have forecast an increase in short term rates. We did not forecast -- we have followed the same procedure in all of our forecasts on long-term rates which, essentially, is to sort of predict them out flat on the grounds that it's very hard to make predictions of long-term rates. Long-term rates have obviously gone above where we forecast them to be right now.

On the other hand, there have been considerable views expressed around the globe, as well as around the country, that longterm rates may be in an -- may have overreacted to the news on the economy, to the news to the change in short-term interest rates caused by Federal Reserve policy. We don't know yet. No one knows yet whether long-term rates have gone up and are going to continue to go up, or they've gone up and are going to come down or they've gone up and they're going to stabilize. No one knows that.

If the economy proves to be stronger, than we anticipate, okay, suppose the economy is actually growing at 3.4 percent rather than 3 percent, or 3.5 percent rather than 3 percent. If market participants perceive the economy to be growing more, then a faster growth rate is consistent with a somewhat higher long-term interest rate. I mean, the fact that the long-term interest rate may end up being above ours is not inconsistent with the possibility that growth also ends above ours.

THE PRESS: Thank you.


END11:05 A.M. EST