US set for boom year as growth rate soars: Economy locked into virtuous circle Deficit shrinks faster than expected Rupert Cornwell reports

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A SURGING growth rate in the final quarter of 1993, higher even than the most optimistic assessments by outside economists, suggests that the US economy has begun what will be its best year since the Reagan boom of the mid-1980s.

According to provisional figures from the Commerce Department yesterday, gross domestic product rose at an annual rate of 5.9 per cent over the period, its most powerful performance in six years. Although the figure was slightly distorted by the earlier impact of the Midwestern floods, growth for the full year was none the less 2.9 per cent, the strongest since 1988.

Icy weather in the East and this month's Californian earthquake are likely to weigh on the current quarter. But the administration and independent analysts are forecasting expansion of at least 3 per cent for 1994, probably lasting into the following year.

As the Clinton administration admits, this recovery is modest by the standard of its predecessors. Total growth since the 'Bush recession' officially ended in March 1991 has been only 7.7 per cent, half the average amount in earlier upswings. But the corollary is low inflation and continuing low interest rates.

Indeed, for the time being the economy is locked into a virtuous circle. The combination of solid growth and last summer's budget package is reducing the federal deficit even faster than expected. This week the respected and non-partisan Congressional Budget Office forecast a deficit of only dollars 171bn for fiscal 1995, down from earlier estimates of dollars 300bn and lower than the dollars 180bn figure mentioned by President Clinton last week.

The smaller deficit in turn helps to take the pressure off interest rates, whose low levels provide more fuel for the recovery. With no sign of a resurgence of inflation - running at about 2.5 per cent at both producer and retail levels - fears have faded of a speedy move by the Federal Reserve to push short-term rates higher.

For the moment, almost every indicator is set fair. The closely watched consumer confidence index stands at a robust 83 per cent. Other figures from the Commerce Department showed that durable goods orders rose 8.6 per cent in 1993, the best since 1988 and pointing to renewed vigour in the manufacturing sector.

Business investment in fact leapt by 21 per cent in the final 1993 quarter, the biggest quarterly gain since 1978. Over the whole year consumer spending climbed just 4 per cent. But housing construction jumped 32 per cent, propelled by the lowest mortgage rates in a quarter of a century.