The recent gyrations in the stock market reflect a pervasive uncertainty about the economic outlook. Professional investors, no less than ordinary citizens, doubt the United States can resume the moderate expansion typical of the 1980s, let alone the rapid growth of the 1950s and 1960s.
Despite a deluge of negative news, much of it misleading and most of it politically inspired, the economy is chugging along. Indications are that gross domestic product, adjusted for inflation, climbed to a record level in the third quarter, thus erasing its loss during 1990-91 recession.
Consumer spending rose at a rate of 3% to 4% during the summer, not bad for a period when consumer confidence supposedly collapsed. Real outlays for housing are up at a 17% rate thus far in 1992. Contracts and orders for plant and equipment rose at similar pace.
Export sales, adjusted for inflation, rose 8% in the first seven months of 1992, compared with a 6.2% gain the previous year.
Problems Are Overstated
Of course, the United States has plenty of problems.
Defense spending is down. Commercial real estate is in a deep decline. The boom in jet aircraft sales has cooled considerably. Even so, these three sectors account for less than 3% of the economy; the other 97% is doing reasonably well.
Pretax profits of domestic manufacturers in the second quarter were up almost 30% from a year earlier. A million more people have jobs today than a year ago.
Fed policy is very easy - too easy. Total bank reserves rose at an annual rate of more than 30% in August and September. Political pressure may force the Federal Reserve to reduce its target for short-term interest rates once again, despite the rapid growth in high-powered money.
Bank reserves are raw material for the money supply. Fed officials are reluctant to ease further, since it could trigger renewed weakness in the dollar and higher - not lower - longterm rates.
The German Bundesbank may take a genuine step toward a less restrictive monetary policy, which would help end the panicky feeling in world stock markets.
In the longer run, the implication is that inflation will eventually heat up in all the industrial nations. This means that investors should look closely at gold and gold mining shares.
Administration's Faulty Index
Ironically, the Bush administration contributed to the image of economic stagnation that the Clinton campaign has used as its principal weapon against the President.
According to the Commerce Department's index of coincident economic indicators (a monthly proxy for gross domestic product), business activity is now declining at an accelerating rate. That conclusion is wrong.
Reported GDP is rising at a moderate 1.5%. Actual GDP is rising faster. The government's measure of current activity is defective. Indeed, the Commerce Department took the unusual step of publishing an analysis discrediting the index that it continues to publish.
The method of calculating the index, the Commerce Department said, "has distorted its recent movements." In response, the Ladenburg, Thalmann economics department devised an alternative index.
In contrast to the government measure, this index shows the economy's steady progress toward recovery. And it has conformed more closely over time to movements in the overall economy than does the government measure.
Most investors, of course, care little for statistical legerdemain. They want to know whether the economy is going up or down, whether to buy or sell.
This is the point: The economy is in better shape than the press, the Democrats, or the bond bulls maintain. As a rule of thumb, whenever Wall Street becomes convinced the economy is stuck in a permanent rut, that is when change is most likely. Solid expansion and further profit gains are in store for 1993.
The Fed's powerful stimulus will eventually produce the critical mass required for rapid expansion. It always has; it always will. Rigorous cost controls have already produced big gains in corporate profits and a much needed rebuilding of company balance sheets.
Leif H. Olsen, Cititorp's onetime economic adviser, says temporary impediments - including defense cutbacks, overbuilt commercial real estate, and regulatory overkill in banking - have prompted a "stuck-door" economy. They have delayed strong growth and higher inflation but won't prevent them.
The longer the "door" remains stuck, he says, the more expansionary monetary and fiscal policy will become. When the structural impediments eventually fade, the door will fly open, and inflation will accelerate along with the economy.
Let's hope that, when the door flies open, the country doesn't fall on its face.