The economic expansion which began in the latter part of 1982 is now six years old. Real Gross National Product grew at 2.2 percent during the third quarter of 1988. A combination of forces suppressed economic performance. Federal Reserve credit tightening earlier this year and the summer drought slowed the rate of expansion. The Commerce Department estimates that the drought reduced GNP by .6 percent during third quarter. They forecast a 1.25 percent reduction for fourth quarter. Thus, the drought has and will mask the performance of the rest of the economy. Filtering out the effect of the drought would reveal a much stronger situation than was recently reported.

     The lower growth of third quarter has temporarily allayed fears of rising inflation rates. However, even sustained modest inflation, as has been the case, can be burdensome to families struggling with their finances. During third quarter the CPI index grew at an annual rate of 4.9 percent, down from 5 percent of second quarter. The consensus view is that inflation will stay in this range in the months ahead. But, if domestic and foreign demand for U.S. products increases, inflation will accelerate. Presently the country's factories are operating at a level which has historically been associated with an inflationary environment.

     Personal income grew faster than inflation during the past three months and business inventories are lean. Furthermore, the dollar remains weak in currency markets. As a result, domestic and foreign demand for U.S. output should be strong during the months ahead. If inflation accelerates, look for the Federal Reserve Board to tighten credit in an effort to keep the economy from overheating. Therefore, there is a substantial probability of higher interest rates during the months ahead.

     The election results were unknown at the time the report was written. Regardless of who wins the election it will take time for the new administration's policies to be felt by the country. It is unlikely that any major economic changes will result from these policies during the next six months.