A peek at US economic pickup had bulls and bears shuffling

Flash. adj. . . . happening swiftly or suddenly. (Webster.) On Wall Street the ``flash estimate'' of the gross national product is one of those signals that can change the mood of investors. It can cause them to think bullish or bearish.

Every three months we get one. The latest reading: a 3.1 percent annual rate of economic growth.

As long as the flash GNP isn't too strong a reading, investors can be encouraged. But if it's weak, they might be worried -- although a little weakness often seems a good thing.

Along the lines of Webster's definition, the flash GNP estimate is not so much sudden (everybody knows it's coming) as it is swift -- a quick report on the United States economy, based on economic soundings taken during April, projected over May and June, and flashed over the news wires even before the final month of the second quarter has run its course.

Thus, its accuracy is somewhat dubious.

Look what happened during the first three months of the year. The flash for January-February-March came in at 2.1 percent. As more-accurate data came in, the GNP was revised to 1.3 percent. Then it was put at 0.7 percent. Last week it was altered again -- to 0.3 percent.

That's negligible growth for the economy.

Now, on Wall Street, while the economy was slowing down during early 1985, stocks were doing fairly well. The Dow Jones industrial average -- which measures 30 of the biggest, most important corporations in the US economy -- moved up above 1,300 to record highs. Other market measurements did well, too.

The main reason for this is that when the economy slows down there is more money around. By the law of supply and demand, that means interest rates can drop. Which they've been doing.

And when interest rates drop, stocks look pretty attractive compared with ``fixed income'' investments like certificates of deposit and money-market accounts.

Stocks have historically had a total return (meaning what you get from both your dividends and your eventual capital gains) of more than 10 percent a year. Straight interest rates, as the table over on the right shows, are well below that today.

So the slower economy helped the stock market.

But over the past few weeks, things have begun to look a little iffy. An economy that slows down too much means an economy that might be teetering on a recession. That could jeopardize the profits of many corporations, cause them to cut dividends, and bring about lower stock prices.

The Commerce Department reported last week that after-tax corporate profits fell 2.8 percent in the first three months of the year, marking the fourth consecutive quarter that profits moved lower.

Amid this kind of apprehensiveness over the well-being of corporate America (many economists were talking about a ``growth recession''), the Dow slipped into a nervous trading range of 1,290 to 1,310.

Then came the flash.

The flash estimated the economy was growing at 3.1 percent. That looks like a recovery from the doldrums of the first quarter.

But, whoa, is it going too fast? Will that cause interest rates to rise again? Or is it like the first quarter, when the flash estimate was revised downward, then downward again?

Moments after the flash was released, investors turned negative. Then they thought better of it and late in the day turned positive. The Dow closed Friday at 1,xxx.xx, down xx.xx points for the week.

Bond prices didn't do so well, however, because the nation's money supply, reported later on the same day, posted a huge rise. Short-term interest rates rose. Bond prices fell. Credit conditions, most investors seemed to agree, won't get much easier.

That, however, is not the view of some specialists.

Orest Pokladok, for instance, a financial economist with Moody's Investors Service in New York, points out that the money-supply numbers gyrate from week to week, and he sees the flash GNP as next to useless -- based as it is only on the data for April.

``It's difficult to find any other data that are picking up except for consumer credit,'' Mr. Pokladok says. Consequently, he thinks the Fed may still stimulate the economy. Even so, Mr. Pokladok agrees that bond prices have been so high in recent months that they are vulnerable now to ``a jagged downward course.''

``Anybody with faith in the `flash' is in trouble,'' agrees William LeFevre, a stock market research analyst at the Purcell, Graham & Co. brokerage in New York.

``If we get a strong revised GNP in the second quarter and the third quarter and the fourth quarter, then it's time to be watching for a resurgence in interest rates. But not before.''

Still, Mr. LeFevre notes that the ``conventional wisdom'' among many investors is that if the economy is zipping along again, the Federal Reserve will have no reason to cut the discount rate -- the interest rate the Fed charges to member banks for loans.

Measuring more broadly than just the flash GNP estimate, Philip Roth, first vice-president for technical analysis at E. F. Hutton & Co., says he has detected a shift among professional investors toward bearishness.

Mr. Roth notes, however, that those investors whose specialty is trading (that is, playing the market more than holding stocks for the long run) have been buying stocks. Many have been picking up bargains -- especially in the hard-hit technology sector.

Mr. Roth thinks technology stocks became ``extremely overvalued'' during the 1978-to-'83 era. They are coming back to earth -- mainly because computer, semiconductor, and a whole array of other companies have been lowering their earnings estimates.

It seems likely that the excitement over whether the economy is too hot or too cool will ebb this week. Investors will be looking toward Friday's release of the index of leading indicators for a more timely reading. Chart: Interest Rates. *Yields; Source: Bank of Boston.

Percent Prime rate 9.50 Discount rate 7.50 Federal funds 7.38 3-mo. Treasury bills 7.00 6-mo. Treasury bills 7.21 7-yr. Treasury notes 10.20* 30-yr. Treasury bonds 10.50*