Times Are Slow, Figures Faulty, So Use Your Noggin

Think plural. There are several turning points in the economy and financial markets today. The dollar is moving up against the yen and the mark, reversing a decade-long downtrend. For interest rates, the trend is down because inflation is lower than generally believed and the U.S. economy is slower than many experts believe.

That makes the outlook for stocks problematical, but that’s always the case.

The important thing to know about turning points is why they are occurring and how deep are the trends they reflect. Also, it’s important to know where the official information--whether government statistics or the stuff that “everybody knows"--is misleading or wrong.

Today’s major trends are fairly deep. The U.S. economy is slower than the Federal Reserve Board thinks and will remain slow. “We believe the weakness will be in the consumer sector,” says Charles Clough, chief investment strategist of Merrill Lynch. “Installment debt is high as a percentage of incomes,” he notes, and falling or stagnant house prices have left mortgage debt high compared to the value of the underlying properties.


That promises a poor Christmas shopping season. “The economy may not reach 2% growth in the second half of this year,” says economist Edward Yardeni of the C.J. Lawrence investment firm.

If any doubt remained, that confirms that inflation is nowhere in sight. “We saw inflation capped at 12% in the 1970s and at 6% in the ‘80s,” says Clough. “What if it peaked at 3% in this decade?” Right now inflation is below 3% and next year could go below 2%.

And that means interest rates are ready to decline smartly. Economist Yardeni predicts that rates on 10-year Treasury bonds will fall to 5.5% from about 6.25% today.

Yet, paradoxically, in that environment of slow growth and falling interest rates the dollar is rising. In recent weeks the world’s central banks and currency traders have collaborated to take the dollar up 16% against the yen and 14% against the mark.


There’s more to go. Analyst Ravi Bulchandani of Morgan Stanley predicts that the dollar will go to 114 yen from about 96 at present and to 1.58 marks from 1.48.

Why is the dollar rising? The central banks are coordinating the move to alleviate the burden of over-strong currencies on Germany and Japan and help those two nations get their dormant economies moving again.

But traders are also buying dollars in worldwide currency markets, which means they agree that the U.S. economy is better positioned for the future than those of Europe and Japan. That’s not what we’re used to hearing from experts, but the traders are right.

It’s well known that Japan’s economy has struggled for years under a burden of bad loans and overvalued real estate. Less widely recognized is that Europe’s economies have been hobbled for years by bloated governments, restrictive laws, high taxes and almost no job creation.

Unemployment in Germany is 9.3% and the trend is worsening. France’s unemployment is 11.5%, Italy’s is 12%, Denmark’s 10%, Belgium’s 14% and so on.

More worrisome in the long term, says Kenneth McCarthy, head of Economic Intelligence Co., a New York currency consulting firm, is that Europe and Japan lag far behind the United States in adopting the new technologies of computer networking and software development.

“That makes it hard for them to reform their economies,” says McCarthy.

Meanwhile, new technologies have transformed the U.S. economy. Good statistics are hard to come by, but Yardeni estimates that business investment in high-tech equipment and software is now running well in excess of $50 billion a year, or 8% of the economy’s total output. Add in consumer purchases and the figure goes to 10% of gross domestic product.


By the year 2000, he estimates, high-tech outlays will be 25% of the economy.

Yet investment in computing and software is severely understated because the Commerce Department doesn’t count software spending by business as investment.

Rather, software is treated the same as paper clips in government statistics.

The government says if you can’t touch it, you can’t count it. Thus it gets the computer world all wrong--counting the value of boxes instead of the information that flows through them.

As Business Week put it recently, the government sees little difference between the transatlantic cable of 30 years ago, which could carry 138 calls simultaneously, and today’s fiber-optic model that carries thousands.

And it completely misses the value of the information transmitted, even though information is the stuff of modern business.

The misunderstandings caused by faulty statistics can be profound. For one thing, the trade deficit that causes so much hand-wringing is way off the mark. It severely undercounts service exports, say a growing number of economists and analysts. “The whole complex of trade statistics is simply wrong,” says Merrill Lynch’s Clough.

In fact, the inadequacies of government statistics make you wonder just what is the economy’s real growth rate or state of health.


So in such times, what’s the ordinary person to do? Think again. Right now, for example, technology stocks are falling back somewhat after a rapid rise.

But as Bill Gates, chairman of Microsoft put it last week--as his firm launched Windows 95--the combined development of computers and communications remains a very powerful trend. So think that technology stocks should be examined as long-term investments rather than short-term trades.

Think low inflation and declining interest rates in the U.S. economy. Think that other countries will now adopt U.S.-style computer-aided economic reforms. Think for yourself.