On Reagan budget, money supply, surge in housing starts
Many brokerages, banks, and economic-research firms publish periodic newsletters on economic trends. As a service to readers, and without endorsing any particular views, the Monitor presents excerpts from some of these newsletters.
The President's budget proposal for fiscal year 1984 is, despite bipartisan rhetoric, a very Reaganesque budget. The spending freeze is quite selective: defense outlays would rise 14 percent while other categories of spending, such as commerce-housing credit and agriculture would decline, respectively, by 79 and 43 percent. Overall, the President's plan calls for a 5 percent increase in spending, for an estimated no real growth in outlays. But much of what the administration is proposing, including the contingency tax increases for FY86 if other conditions are met, will either be ignored or reworked by Congress.
- Smith Barney, Harris Upham & Co., Washington
One reason that money growth has been unusually strong arises from the plethora of new financial assets resulting from financial deregulation, and these instruments did not exist a year or two ago. For example, there are now: ( 1) money-market deposit accounts at banks; (2) Super NOW accounts at banks; (3) NOW accounts at banks; (4) money-market mutual-fund accounts at brokers; (5) overnight repo's (repurchase agreements) for consumers and businesses; (6) Treasury strip bonds in coupon and zero forms; (7) IRA, Keogh, and deferred-compensation accounts; and many, many more that could not be listed. On the other side of the financial fence, there are changing loan patterns: the variable-rate mortgage, bullet loans, and wraparound mortgages, not to mention lease and lease-back financing for businesses.
The point of the above short list is that the Federal Reserve Board does not determine what money actually is; rather, it is determined by the marketplace. In short, simplistic statements about money growth, using historical definitions and analogies, are likely to lead to simplistic and wrong conclusions.
- Dean Witter Reynolds Inc., New York
Industrial production's rise last month may not have been a big surprise, but the surge in January housing starts certainly was. Yet some of the 36 percent advance from December's level was the result of seasonal-adjustment aberrations, caused in large part by the abnormally warm weather. So we expect starts to make a much less stellar showing in February.
Nevertheless, housing is on a decidedly strong uptrend, one that is helping to put the overall economy firmly on the comeback trail. That's clearly evident when we use a three-month moving average of housing starts, which we deem a much better gauge of housing's underlying strength than the volatile month-to-month series. Using this three-month average, we find that starts averaged 1.45 million units in the three months ended in January, up about two-thirds from the year-earlier period.
-Citibank, New York.m
Eventually, the high cost of money will bring about credit contraction; interest rates will then finally ease. But the contraction will also result in protracted economic slug-gishness, further squeezing corporate profits. As sharply disappointing earnings are reported, money managers will inevitably respond by dumping industrial shares en masse. The equity-oriented funds may well have to switch into the electric utilities, which . . . could be the most outstanding stock group for the remainder of this decade.
-T. J. Holt & Co., Westport, Conn.