Share this story
Close X
Switch to Desktop Site

Resolved: that the US economy is on the verge of . . .

IMAGINE a debate among economists on this topic: Whereas the Dow Jones industrial average plunged a record 86.61 points last Thursday, and whereas the stock market is regarded as an excellent leading indicator of economic trends, be it resolved that the United States economy will soon plunge into recession. AFFIRMATIVE: Honorable ladies and gentlemen, my honorable opponent; as we all know, the market slump of 1929 preceded the Great Depression of the 1930s. We have had less dramatic warnings from stock prices of post-World War II recessions. Last week's action is just another useful warning.

NEGATIVE: Honorable ladies and gentlemen, I must disagree with my honorable opponent. It is true that a bear market has usually preceded a slump in the economy. But as MIT's Nobel Prize-winning economist, Paul A. Samuelson, noted one time, the stock market has forecast nine of the last five recessions. In other words, the stock market sometimes goes through its own cycles independent of the economy. Indeed, I believe it is self-evident that last week's price free-fall was the result of technical factors mostly unrelated to the economy. The sell-off may have been triggered by fear of a rise in interest rates. But it picked up speed when shoved by computer-driven Wall Street trading strategies. Last week's action was just another shift in a market beset by violent price swings, such as those that have occurred on ``triple witching'' Fridays when stock options, stock-index options, and futures contracts expire simultaneously.

About these ads

AFFIRMATIVE: It is quite clear that the economy has been floundering. The rise in interest rates will worsen that. It could eventually kill off the housing boom. I might add, ladies and gentlemen, that the retail sales for August, announced Friday, were not encouraging. They rose only 0.8 percent from July, whereas many observers had been expecting a gain of as much as 4 percent.

I need only list other troubles of the American economy to indicate we shall not escape a recession. There are signs of renewed inflation, continued massive federal budget deficits, a persistent huge balance-of-payments deficit, the ever-dangerous developing-country debt situation, and a rapid buildup in US foreign debt. My honorable opponent cannot ignore these facts.

NEGATIVE: Ladies and gentlemen, let me cite a few positive factors in the economy to rebut my honorable opponent. The civilian unemployment rate in August dropped to 6.8 percent, from 6.9 percent in July and 7.1 percent in June. This economy is still churning out new jobs.

With the offer of low financing rates, sales of domestic cars are booming. Home sales and housing starts are thriving. Surveys show that consumers are in a buying mood for big-ticket items. Exports are picking up. This economy has started to rebound.

I would also like to cite the view of a cyclical expert, Leonard H. Lempert of Statistical Indicators. He concedes that in the past the stock market has been one of the best so-called ``leading indicators.'' Stock prices have dropped before economic downturns and risen before recoveries.

But he now sees a ``complete reversal'' of this traditional behavior. Stock prices seem to be reacting to anticipated interest rates, rather than economic trends. Stock prices fall when investors believe interest rates will rise, and vice versa. It may be puzzling, ladies and gentlemen, but the economy has often behaved mysteriously in the 1980s.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.