FROM THE OFFICE OF PUBLIC AFFAIRS

When you were here three months ago, real growth was running close to 4 percent and inflation was about 1-1/2 percent. The Asian situation showed signs of stabilizing and adverse impacts on the U.S. economy were fairly hard to find. Now three months later, there are similarities and there are also emerging differences.

Let's take the domestic side of the equation first. Real growth in the fourth quarter and in the first quarter were similar in overall magnitude. The fourth quarter is now carried on the books at 3.7 percent annual rate, although we may have been quoting an advance estimate of 4.3 percent when you were here. Those things happen. Suppose we split the difference and call it 4 percent for the fourth quarter. That, in turn, is very close to the 4.2 percent advance estimate for the first quarter which was released last week. Not much is lost by calling this a 4 percent quarter, too.

There is a world of difference between the two quarters in the composition of that 4 percent growth. This quarter looks a lot better. In the fourth quarter of last year, final sales to domestic purchasers slowed abruptly to growth of 2 percent annual rate and business capital investment actually moved into the negative column.

The fourth quarter's 4 percent real growth was only achieved through some piling up of inventories and a sizable improvement in net exports, widely recognized at the time as reflecting difficulties of seasonal adjustment.

The first quarter's real growth is much more solidly based. Final sales to domestic purchasers rose at a 6 percent annual rate with business investment posting a large gain. Inventories were a relatively neutral influence and the 4 percent real growth in the first quarter was achieved despite roughly a 2 percentage point subtraction from net exports, some of which was a reversal of the fourth-quarter seasonal effect.

An improving pattern between the fourth and first quarters is also evident in inflation performance.

The GDP chain-weighted price index was up at an annual rate of only 0.9 percent in the first quarter, down from 1.4 percent in the fourth quarter. The increase over the last year was also 1.4 percent -- the smallest such four-quarter change since 1964.

The behavior of an alternative measure of prices was even more striking. The price index for gross domestic purchases excludes exports and includes imports, hence reflecting the prices paid by U.S. consumers, businesses, and the public sector. This index was flat in the first quarter for the first time since 1954.

Part of this return to zero inflation was due to falling oil prices which may not last. But, another part can probably be attributed to foreign competition and global disinflation, which may even intensify as Asian adjustments proceed. In the past year, the prices of our nonpetroleum goods imports have fallen by more than 4 percent.

The latest reading on the employment cost index for the three months ending in March was also relatively encouraging in the inflation context. The seasonally adjusted quarterly index for total compensation rose by only 0.7 percent, or a modest 2.7 percent annual rate and the smallest quarterly increase in a year. The only reservation would be that quarterly changes in the series can be volatile and that the first quarter result may be exaggerating the extent of improvement. By most other measures, labor markets are extremely tight.

Still, it is impressive that after seven full years of expansion, with the unemployment rate at or below 5 percent for the past twelve months and real GDP growth close to 4 percent over the past six quarters, inflationary pressures actually seem to have eased.

The emerging difference in the current situation is that adverse effects on real activity in the U. S. are beginning to be felt from Asia. Up to this point, the chief impact had come in the form of lower inflation and lower interest rates, both of which considered in isolation could certainly be viewed as desirable developments.

The impact of the East Asian crisis is now beginning to show through in the U. S. trade data, in the form of a reduction in U. S. exports. From October through February, U. S. merchandise exports fell by nearly 5 percent, most of it recently, with the major East Asian countries accounting for 80 percent of the drop. These results are approximate and based on unofficial seasonal adjustment.

U. S. exports to the area are likely to fall further in most cases, not only because of income compression in Asia, but also because exchange rate movements have made U. S. goods relatively expensive and a further loss of market share is likely.

There has not been much sign yet in the published data of increased U. S. imports from Asian countries. If such an effect were to materialize, and it seems inevitable in the course of a successful Asian adjustment, it could imply some additional dampening influence on the growth of U. S. GDP.

Looking out to the future, slower U. S. growth seems sure to emerge. Continued growth at a 4 percent rate hardly seems feasible, even on the most favorable assumptions for productivity performance. But no drastic shift in the policy settings would seem to be required. The gradual emergence of restraint through the medium of a wider net export deficit would appear to be a highly probable development during the balance of the year.

Some recent indicators already seem to be pointing in that direction. Unfortunately, in this business, some indicators can usually be found pointing in any direction. But, it may be significant that industrial production has flattened out recently, growing at only 1 percent annual rate in the first quarter; and that the latest survey of the National Association of Purchasing Management reported a slower rate of growth in manufacturing in April. These might be early signs of the return to a more moderate pace of growth.

All things considered, growth near the economy's trend potential of 2-1/2 percent or so seems the most likely outcome going forward, along with the continuation of relatively low inflation and low interest rates.

That is a summary of recent economic developments and the near term economic outlook.