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Hopes for a Slowdown

Every time the numbers suggest an economic slowdown, a sigh of relief resounds on Wall Street.

Last week produced several deep sighs. Evidence piled up that the economic pace is declining from the sizzling 5.4 percent annual rate in the first quarter of this year.

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Employers, for example, added a modest 205,000 jobs in June, compared with 309,000 in May. The unemployment rate rose from 4.3 percent in May to 4.5 percent in June.

The National Association of Purchasing Managers said manufacturing slowed in June for the first time in nearly two years, hit by the troubles in Asia.

The Index of Leading Indicators, a statistical series put out by the Conference Board in New York to predict future growth, remained flat in May.

It suggests "sluggishness in the economy," note economists with Brown Brothers Harriman & Co in New York.

Spending on construction slumped 1.5 percent in May, the worst drop in four years. Orders for durable goods declined 2.5 percent in May.

Then General Motors Corp. reckoned that the cost of two United Auto Workers strikes in Flint, Mich., reached $1.18 billion in income. That large amount surprised some analysts. The strike is a further drag on the economy.

'Easing, not tightening'

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Cheering in the financial community may seem odd, considering that corporate profits weaken when sales moderate. But slower growth also assures that the Federal Reserve will not hike interest rates. And when Fed policymakers met last week, they left interest rates unchanged, as expected.

"It would have been inappropriate to do anything," says Philip Braverman, chief economist with DKB Securities (USA) Corp., New York.

There is little inflation in the United States economy for the Fed to fight.

"The recession in Asia threatens to become global," Mr. Braverman adds.

Asia's difficulties have depressed commodity prices, hitting the economies of Australia, Canada, New Zealand, Russia, East Europe, and Latin America.

Braverman figures national output in the US will grow at a modest 2 percent annual rate for the rest of this year.

Bruce Steinberg, chief economist for Merrill Lynch, agrees.

"The next Fed move will be an easing, not a tightening," he maintains.

Happiness on Wall Street

So why does Wall Street cheer, with stock prices measured by the Standard & Poor's 500 index rising a scant 1.2 percent last week on the slowdown news?

Braverman explains that the slower pace prompts interest rates on bonds to decline. Then, regardless of corporate profits, stock prices rise.

In recent decades, they have gone up an average 20 percent on such occasions as investors see stocks as a more competitive way to make money than bonds.

"So anything that can drive interest rates lower is good for stocks," he says.

A 20 percent annual return may be too optimistic for the moment, Braverman says. The pattern in the past includes periods of recession when investors were anticipating economic recovery.

Most economists don't expect the slowdown to become a recession.

Their consensus calls for real national output to rise 3.1 percent this year and 2.3 percent next year.

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