Market’s Dive Reveals No Signs of a Sinking Economy

Once again, Wall Street has demonstrated its ability to seemingly defy logic--and infuriate Main Street America.

In response to good news Friday that the economy created 705,000 jobs in February, Wall Street sent stock and bond prices tumbling.

Investors feared that a stronger economy meant an end to the decline in interest rates that has continued since 1994. Traders feared that reduced unemployment would lead to wage inflation.

But that’s the kind of thinking that makes ordinary people wonder at Wall Street’s contrariness.

When companies “downsize” by laying off thousands of workers, traders lift their stock prices; when the employment report is surprisingly positive, the market declines.

But, in fact, the market’s record is poor on reflecting--or predicting--the real economy of jobs and living standards. In 1987 and 1989 the stock market took swan dives--of far greater percentage magnitude than Friday’s fall.

Those earlier downdrafts were caused by very different forces--a strained global economy and the collapse of debt-financed corporate takeovers.

Yet when the dust settled after those earlier declines, Americans saw that the economy was still growing and relatively unaffected by the stock market. The odds are very strong that it will be that way this time, analysts said. By comparison to previous episodes, Friday’s was a mild anxiety attack based on fears that a strong economy will push up interest rates.

“It’s hard to see where basically anything has changed in the economy,” said Joan Payden, president of Los Angeles investment firm Payden & Rygel.

In fact, analysis is difficult in an economy that sees mysterious patterns of layoffs one week coinciding with a jump in jobs the next.

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Wall Street often fails to see the forest for the trees. Traders, who wield immense power in today’s fast-moving financial markets, fear inflation if workers demand raises or companies increase production. But these traders don’t recognize that the expanded global economy now provides a broader canvas for the sales and purchases of U.S. companies. Nor do they acknowledge that changing technology, the efficiencies that computers bring to assembly lines and offices, allow companies to displace some workers while creating opportunities for others.

And so the U.S. economy’s adjustment to the twin factors of global business and changing technology is accompanied by the volatility that has sent the market soaring 500 points since December and tumbling close to 200 points on Friday. But change is both disturbing and rewarding.

Yet for all the furor of a 171-point decline in the Dow Jones industrial average and a leap to 6.72% in the long-term Treasury bond, Friday’s events should not be overstated. There was little panic selling and phones were not ringing off the wall, brokers said.

Will interest rates continue to rise, economist Sung Won Sohn of Minneapolis’ Norwest Corp. banking company asked on Friday. “No,” he answered himself, “the economy won’t be strong enough to support rising interest rates very long.”

The best way for people to understand what’s happening is to look at what the Labor Department’s jobs report really said about the vast U.S. economy, which turns out $7 trillion of goods and services every year.

It said the economy is strengthening but not in an exaggerated way. The jobs increase was partly due to stepped up production from factories after a long period of excess product inventories, which had reduced the economy’s growth for much of last year. It is normal to have stops and starts in a long expansion of the economy--and this current expansion began in 1991. So the latest figures mark a turn back to a slightly faster growth cycle, experts said.

Also, there was hiring in schools and places of recreation that had closed temporarily during bad weather over portions of the nation in January. So some of the employment gains were a bounce back from temporary conditions, said Katharine G. Abraham, commissioner of the Bureau of Labor Statistics.

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Beyond the jobs report, news was good. The global economy seems finally to be picking up steam. Japan is reviving after five years of recession and that’s important. The world’s second-largest economy is a big customer for U.S. goods and has a major effect on other countries of Asia. Mexico’s economy is improving after a horrendous recession year and that promises a return to sales of $50 billion a year in U.S. exports.

More important than numbers is the fact that other countries are reforming their economies to spur their own growth and open their markets. That makes for growing commerce without rising inflation, Payden said.

Economists did not want to make bold predictions of better times in the face of Friday’s swift decline in the market. But it could well be that the global cycle is turning to faster growth and a little extra in the paycheck here at home. That would answer a need and desire of the American people. It’s no accident that the presidential primary campaigns have ceased to focus on balanced budgets and now talk about job growth.

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But that’s why Wall Street is nervous, said Stephen Roach, an economist with the Morgan Stanley investment firm who has long maintained, correctly, that the economy is stronger than other experts have believed.

Roach also has predicted that U.S. workers would seek a greater share of industry’s productivity gains in recent years by demanding higher wages and that would lead to wage inflation and a reversal of a long pattern of declining interest rates.

But another economist, Alan Greenspan, chairman of the Federal Reserve, sees things differently. Greenspan, the inflation fighter whose hand is on the tiller of U.S. interest rates, has said many times that he sees a virtuous pattern of growth and productivity--that is, more bang for the same buck--in today’s economy, similar to that of the early 1960s.

If Greenspan and other economists are correct, Friday’s market fall was a hesitation at a slight quickening of the pace. The key will be how the economy performs over the next couple of months. If investors and Wall Street money managers perceive a continuation of relatively good times, the stock market will react accordingly, analysts said. As J.P. Morgan once said--in what is an understatement today--the stock market will fluctuate.