‘Real’ Economy Prospers in Turmoil : For Now at Least, Business Grows Amid Crisis in Markets

It has been a weird few months. Ever since Black Monday--Oct. 19, when the stock market lost a fifth of its value--we’ve had two economies.

One is the economy of the commentators and of the stock, bond and foreign-exchange markets. Listen to them and you hear the rumble of a great crisis. There’s much turmoil and foreboding. The other economy consists of real people and real businesses. It’s boring and remarkably prosperous.

You’re not crazy or misinformed if you feel confused. The stark contrast between the two economies suggests that today’s economic “crisis” is something of a phony. The phrase recalls “the phony war” of late 1939 and early 1940. In September, 1939, Germany attacked and quickly conquered Poland. England and France, acting under treaty obligations to Poland, declared war on Germany. But for months there was almost no fighting. Everyone was agitated, but little happened.

There’s a similar air of unreality in today’s economic crisis. Just last week, for example, the Commerce Department announced that the U.S. trade deficit was $17.6 billion in October--a figure far higher than expected. Predictably, the commentators and the markets were noisy and anxious. Stocks and the dollar “plunged,” the Wall Street Journal said. Interest rates “surged.”

But switch now to the economy of real people and real businesses. Nothing since Black Monday indicates that this economy has been significantly affected by the market crash. There are minor aftershocks, but overall retail sales are still rising and businesses apparently haven’t sharply cut investment plans.

Businesses are most influenced by recent experience, and for many companies 1987 was a very good year. Consider the lumber industry. In the 1981-82 recession it suffered. Many mills were shut. But in 1987 domestic demand for lumber hit a record high, as it had in the previous three years. Although new housing starts were below the 1970s’ peaks, the drop was offset by slightly bigger homes and a remodeling boom--outdoor decks, family rooms and new kitchens. Since 1983, repair and remodeling spending has risen about 85%, to more than $90 billion.

The story isn’t exceptional. Plastics go into everything from garbage bags to toys, from construction pipes to soda bottles. In 1987 plastic production jumped 8.5%--nearly double the prediction at the beginning of the year. Exports have increased an estimated 19%. Sales of electronic semiconductors (the tiny “chips” and related components that go into computers and electronics products) rose 20% in 1987.

Nor is the gap between economic rhetoric and reality confined to the United States. In Europe and Japan there’s loud worrying that exchange-rate changes will depress their exports. (The dollar’s fall makes U.S. exports more competitive, while the rise of other countries’ currencies hurts their exports.) Especially in Europe, some statistics paint a dreary picture. Since 1983, Europe’s unemployment rate has exceeded 10%. In 1987 Germany’s economy is expected to grow a meager 1.5%.

It sounds grim. What Europe is actually experiencing, though, is a plodding prosperity. The unemployed receive generous benefits, and everyone else is reasonably content. As for West Germany, its economy “isn’t in bad shape,” says economist Norbert Walter of the Deutsche Bank. Exports have helped us better than was expected. Unemployment has risen only slightly, and consumer spending is strong. In Japan the economy is more robust. Expanding domestic spending has offset weakening exports.

Which picture do you believe: the alarms of catastrophe or the bland reassurances? Perhaps both.

The cliche “if you’re not confused you don’t understand the situation” applies here. What the turbulence of the financial markets signifies is that people no longer know what to expect. These markets reflect daily guesses about the future. Looking to the future, investors aren’t predicting disaster. But increasingly they can’t see clear solutions to some of today’s problems. Ignorance breeds fear, and fear breeds erratic markets.

It’s important to keep perspective. Despite its decline, the stock market is still roughly where it was a year ago, and that’s about twice its 1982 level. Paradoxically, the calm of the productive economy amplifies the anxieties of the financial markets. Governments act only if there’s a crisis, it’s said. The absence of a visible crisis means that governments won’t act forcefully enough. Then matters will get worse.

The stock market’s crash was such a spectacular event that we strain to find its meaning. We can’t abide the thought that it was a random event without momentous significance. The trouble is that we barely know what caused the crash--the details are being pieced together now--let alone what it means. Maybe today’s crisis is phony. But there’s an unsettling reminder from the phony war of a half-century ago: In the end it became very real.