Fears of overheating as US output grows 7.3% in a quarter

THE US economy grew much faster than previously estimated last year, expanding at the fastest rate for 16 years in the last quarter, according to statistics released yesterday.

The Federal Reserve has increased interest rates five times in nine months, fearing that rapid growth and resurgent inflation could knock the economy off track. But there has been little evidence that growth has slackened.

Yesterday the head of the Federal Reserve Bank of Chicago added a further warning that the economy is expanding too fast. "We think it's growing at a rate that is not sustainable," said Michael Moskow.

Gross domestic product expanded by a stunning 7.3 per cent in the last quarter of 1999, the US Commerce Department reported in its final revision of the figures, up from an already healthy estimate of 6.9 per cent. The preliminary figure had been 5.8 per cent.

The last time the US economy grew this quickly was in 1984. For last year as a whole, growth was 4.2 per cent, making it the third year in succession that America has grown faster than 4 per cent.

Part of the reason for the fourth quarter's strength was the accumulation of inventories ahead of the end of the year, based on fears about the Y2K computer bug.

The figures showed that inflation was still moderate, despite rapid expansion in consumption, stock building and a strong export performance. The implicit price deflator for GDP was 2.3 per cent. The core rate - which excludes food and energy costs - was at 1.9 per cent, up a little from 1.2 per cent in the third quarter but lower than the earlier estimate.

Bond markets reacted calmly to the news, in part because they had expected a revision upwards to 7 per cent, in part because the equity market had a difficult morning. The benchmark US 30-year Treasury bond rose by about half a point in early trading, and the yield fell to 5.94 per cent. Bonds have had a cautiously optimistic week, as the Opec oil agreement and evidence of a consumer slowdown bring hopes that interest rates will stabilise at current levels.

But analysts believe the Fed is still likely to increase interest rates by a further half a percentage point this year.