Roaring market: roaring recovery?
The stock market is predicting a dramatic upturn in the economy.
In the face of some steep declines in the past, Wall Street has predicted recessions that never occurred. This time around, is Wall Street on target? And if it is, when will the rest of the country begin to feel as rich as the brokers who are frantically writing tickets on Wall Street?
Economists and stock market professionals surveyed by the Monitor hold that the market is on target this time: There will be a substantial recovery of the economy. But they differ widely on when it will occur. Some believe that by Christmas retailers will begin to notice a new optimism among consumers - who will be the driving force behind the upturn - while others feel the recovery Wall Street is anticipating will take place in 1984, at least 14 1/2 months from now. And some economists believe there has been a significant amount of structural damage done to the economy as factories have closed permanently and some industries have shrunk. This would inhibit the ability of the economy to bounce back completely.
How strongly it will snap back is the subject of some debate. Some economists , such as Allen Sinai, senior vice-president and economist at Data Resources Inc., a research firm, predict the recovery will be anemic early in 1983 but will gain strength later in the year. Others, however, say the recovery will begin shortly and will be ''quite strong'' by the end of the first quarter of 1983. They say auto sales and housing will make a dramatic comeback.
Economists have a variety of reasons for believing the market is correct this time in predicting an economic upturn. Martha Seger, an economist and commissioner of financial institutions for the State of Michigan, notes that, ''of the government's leading indicators, stock prices have the best batting averages. . . . You can't look at every daily wiggle, but I think it's right this time.''
Richard Hoey, chief economist at Bache Halsey Stuart Shields Inc., a brokerage, says he thinks the market is on target this time because the Federal Reserve Board has changed its policies. ''Paul Volcker has been hinting for three months that he would tend to generate an economic recovery even if the money supply accelerated. Last week, he stopped hinting and committed himself. He said he will do it and he has the power to do it.''
Exactly when the recovery will occur is another matter. Ms. Seger, for example, expects the economy will start perking up this quarter and will be ''dramatically better'' by the first quarter of 1983. But the recovery won't come until 1984. ''The market fully understands the recovery over the next six to nine months will be anemic,'' he says, ''and is looking a good deal into the future. We expect a solid recovery in 1984.''
Some key investors disagree. John Bogle, president of the Vanguard Group of mutual funds, which manages $5.6 billion, says he is expecting the recovery to begin in the fourth quarter. He says that ''even autos ought to begin to show some improvement and over the next nine months should really start to do something.''
Michael Peers, chairman of the Ivy Fund Inc., a $70 million mutual fund, likewise believes the economy has reached its bottom. ''I think unemployment will even begin to improve in the fourth quarter,'' he said.
Stephen Arpante, president of Keystone Massachusetts Inc., a fund that runs about $1.1 billion, says, ''If you ask six different people when the recovery will begin, you'll get an even split. The important thing is that inflation has been modified and actions have been taken to get the economy moving in the right direction.''
An early sign investors will be watching to determine when the economy bounces back will be retail sales around Thanksgiving, leading to the Christmas season. Mr. Hoey says he will also be looking for early signs of a rebound in auto sales. ''What will propel this economy,'' he says, ''will be the wealth effect. The consumer is going to act wealthier and start to spend.''
Ms. Seger says she has already seen some signs of improvement in Michigan. In the Bloomfield Hills-Birmingham area north of Detroit, she relates, real estate agents had more sales in August than new listings. Nationwide, she points out that it's difficult to spot such improvements, since it takes a long time to accumulate the statistics.
Mr. Hoey, however, says he has observed a recovery in housing prices which he says ''will be a sign of relief to all homeowners.'' Ben Laden, an economist at T. Rowe Price, a Baltimore mutual fund group, forecasts that mortgage rates, reflecting sharply falling interest rates, will drop to 11 percent by the end of the year. This, too, should help the depressed housing markets.
Employment, however, is expected to lag. In the initial stages of a recovery, corporations tend to put workers on overtime instead of rehiring laid-off workers. Thus, an early sign of the recovery will be an increase in the average workweek, indicating that those workers with jobs are working longer hours. Rehiring of workers is the next phase after that. Ultimately, says Mr. Bogle of Vanguard, the country should see some large increases in productivity as utilization of capacity increases but wage demands remain stable.
Mr. Sinai of Data Resources doesn't expect to see much improvement in the unemployment rate until 1984. ''Employment will be a structural problem for years,'' he maintains.
And other structural problems will remain after this recession ends, he says. For example, he believes the damage done to the thrift institutions will result in some changes in financial institutions. And with companies like International Harvester and Chrysler still in financial difficulties, there could be ''some major shifts in American business structure.''
Ms. Seger, however, believes there have been some positive structural changes as well. She says the auto companies, after talking about improving the quality of their products for years, have finally made positive changes. She also sees an improvement in worker attitudes. ''They seem to be better at going to work and, while they are there, producing a better product.''