Some - but not all - bad economic news is behind us
The sharp stock market fall Oct. 19 - and the turbulence since - is forcing a widespread reevaluation of the economic outlook. Without making any forecast of future stock market activity, I suggest that the bad news may not be all behind us. The large reduction in asset values on the part of many investors is not the end of the matter. Consumers are now reconsidering plans for buying homes, cars, appliances, and other big-ticket items. So far it looks like most people are going ahead with their purchases. Lower interest rates and an improved inflation outlook are a plus for credit sales.
But revisions in consumer spending are likely to be generally downward, as families postpone or scale back some of the items on their shopping lists. Businesses in turn are watching this process closely as they make their own sales and production projections for the coming year.
To add to the uncertainty, so far Washington's reaction to the troubles in financial markets is confusing. Alan Greenspan's statement that the Federal Reserve System he heads will supply adequate liquidity was helpful. But the continued bickering on the budget between the Congress and the White House is not.
The federal deficit is only one of the many factors influencing financial markets, along with monetary policy, prospective tax changes, and developments overseas, but it is a factor very much subject to our domestic policies and actions.
It is disconcerting, therefore, to see the great difficulty the leaders of the federal government - in both the executive and legislative branches - experienced in finding a fairly modest $73 billion of savings over the next two years.
We can only hope Congress and the administration do not repeat the kind of fiscal game they played last year when they supposedly ``saved'' the Treasury several billions of dollars by moving one month of military pay disbursements from Sept. 30 (the last day of one fiscal year) to Oct. 1 (the first day of the next fiscal year). The current talk of a tax increase just as the economy is softening does not exactly constitute perfect timing. In any event, the market's plunge did get the attention of Washington policymakers.
Further dramatic declines in the stock market could really hurt the economy. But so far all sectors of the economy continue to operate at high levels of output, and inflation in coming months is likely to be lower than expected just a month ago. The industrial production index, at 130, is a record high. But we tend to forget that the stock market is a leading indicator. That is why statements by government spokesmen about the length and strength of the recovery are not as relevant as the action they take to help ensure the continuation of that upward trend.
In my view, participants in financial markets are hoping for three specific actions: (1)tighter fiscal policy via a series of serious spending cuts programmed for this fiscal year and next, (2)accommodating monetary policy, with the Fed tending to err on the side of ease, and (3)scratching the protectionist trade bill that the Congress is now writing. If all three factors occur, that will improve the now shaky confidence in stock and bond markets. If two or even one of those items is not forthcoming, that would be an unpleasant shock.
Clearly, we are not out of the woods yet. In the increasingly global economy in which we live, surprises can come from overseas as well as here at home.
Unlike 1929, however, a substantial financial safety net is firmly in place. The key elements include federal deposit insurance, social security unemployment compensation, and (I add this with some reluctance) a nationwide welfare program. Moreover, the Federal Reserve System is much more aware of what it takes to operate a sensible monetary policy. Five or six decades ago, the Fed governors had not even heard of the esoteric concept that we know today as the money supply.
In the private sector, I would cite as an underlying strength the rise of large pension funds. Despite the focus of their managers on short-term results, these funds are essentially aggregations of long-term money with limited need for extra liquidity. Also, many companies are in strong cash positions, and individual risk exposure is now limited by restrictions on stock purchases on margin. Moreover, it appears that much of the money that has left the stock market is not going into the proverbial mattress. Unlike 1929, there is a substantial movement of investment funds to government bonds and banks.
Any economic or financial forecast at this period of uncertainty should have a warning label on it. Most economists in the United States are shaving their forecasts - typically from 3 percent expected growth in 1988 to 2 percent or less.
Recession still does not show up in my foggy crystal ball, but the odds of a downturn in the economy are greater than they were a month ago. In any event, any contingency forecast should relate to the possibilities of a standard recession, rather than a 1930s-style depression.
Conceivably, enough stupid actions can be taken in both the private and public sectors to end the aging recovery that appears to be still under way. But on balance, a positive assessment still seems to be in order for the American economy.
Murray Weidenbaum is director of the Center for the Study of American Business and a former chairman of the Council of Economic Advisers.