Economy Up Strong 3.7%; Inflation at 20-Year Low

WASHINGTON —  The nation’s economy grew at a surprisingly strong annual rate of 3.7% in the first three months of the year, a fivefold increase over the previous quarter, the government reported today.

The Commerce Department said the gross national product, the broadest measure of economic health, turned in its best performance since a similar 3.7% increase in the first three months of 1985.

The news on inflation was even better. A price index tied to the GNP rose at an annual rate of 2.5% from January through March, its best performance in almost two decades.

While the Reagan Administration today reaffirmed its prediction of a 4% growth rate from the final quarter of 1985 to the same period this year, the upward revision in the first-quarter growth from last month’s 3.2%estimate caught analysts by surprise. Many had predicted that the first-quarter GNP rate would be revised downward to 2.5%or even lower.

Analysts Unimpressed

Still, the stronger-than-expected growth did not impress many analysts, who noted that the gain came from an upward revision in the growth of business inventories.

That change added $7 billion to GNP growth, but economists said this will subtract from growth in the current April-June quarter as businesses are forced to pare down unwanted inventories, especially a record-high level of unsold cars.

“It is stronger than everybody thought it would be, but it is strong in a bad way,” said David Berson, senior economist at the New York investment firm of Merrill Lynch. “When the strength comes from an increase in business inventories at a time when sales are flat, that means production is going to be cut to reduce those unintended inventories.”

Domestic Auto Cutbacks

Berson noted that domestic auto manufacturers have already announced production cutbacks in the current quarter and he predicted growth will dip below 2% from April through June, even weaker than the 2.2%growth turned in for all of 1985.

But he said lower energy prices and lower interest rates should push growth in the second half of the year to 4% or higher.