Market's role as predictor loses its way

Economy: Some analysts dismiss the belief that the recent plummet heralds a recession.

August 01, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

Conventional wisdom, says economist Scott Hoyt, holds that the stock market is a harbinger of the economy. If that is true, then the country is heading for another recession.

But Hoyt and other economists believe that conventional wisdom is wrong. The market, they say, is sending a message, but it is not about an impending economic disaster.

"Our opinion is it [market] is giving us a false signal," said Hoyt, director of consumer economics at Economy.com in West Chester, Pa.

"The market is not a foolproof indicator as to where the economy is going, by any stretch of the imagination."

The economy and the market typically move in the same direction: When the market is rising, the economy generally follows the same path and grows.

But while the market has been plunging - wiping out $2.6 trillion in wealth this year - the economy is showing steady signs of recovery.

Economists believe there is a major "disconnect" between the stock market and economic reality today because several key economic indicators remain strong: industrial production, unemployment claims, productivity and housing sales.

"I don't know if anybody really knows what the hell the stock market is telling us," said Ken Goldstein, economist at the Conference Board, a New York-based business research group.

"The stock market is supposed to tell us what people anticipate about future earnings. What it really does tell us is that a lot of folks can't get to Atlantic City."

Added Thomas F. Carpenter, chief economist at ASB Capital Management in Washington: "We do have this gigantic disconnection. We are in a strange environment.

"I have been in the business since 1979, and I haven't seen this."

Economists have even poked fun recently at the market's odd behavior. "The joke is that the market has predicated nine of the last five recessions," Hoyt said.

Although many economists reject the notion that the economy is heading for its second recession in a year and a half, they worry that a prolonged drop in the market could ultimately shake consumer confidence and push the country into another recession - what they call "a double dip."

But most don't see that happening.

What the market is saying has more to do with morality, anger and fear than the economy, experts said. Its abrupt decline has been triggered by accounting scandals, corporate greed, bankruptcies and government action to punish executives.

"The stock market is suffering from what I call an anxiety neurosis," said Robert Sweet, chief economist at Baltimore-based Allied Investment Advisors. "There are too many worries right now.

"The worries center around terrorism and a possible attack, corporate governance, lack of trust in Wall Street analysts, accounting and auditors. The only worry that it doesn't have is the economy."

Donald R. Hays, president and investment strategist at Hays Advisory Group in Nashville, Tenn., said the market is acting like a moral compass.

The market is a "barometer of everything, not just the economy," he said.

"What it is doing is telling us that there is still a lot of excesses that were built up in the 1990s bull market, that greed cycle, that have not been wrung out," he said.

"A lot of what we are now seeing is bursting the bubble. The greed just had to be wrung out."

Mark Vitner, senior economist, at Wachovia Securities Inc. in Charlotte, N.C., said the market's decline is a sign that "investors are confused."

"The economic data is more confusing than usual," Vitner said. "There is still a great debate as to whether it [the recession] is over or not."

While the market has plunged, the economy has grown. Gross domestic product - the value of goods and services produced by American business - grew at an annual rate of 2.7 percent in the fourth quarter, a blistering 5 percent rate in the first quarter, but slowed sharply in the second quarter to rate of 1.1 percent.

Despite the slowdown, many economists say the economy is in decent shape and should pick up steam as the year goes on.

They are optimistic because:

Industrial production - goods made in factories, mines and utilities - rose for a sixth straight month in June.

Retail sales jumped by 1.1 percent in June, as consumers bought cars, computers, appliances and clothes.

New home sales rose to a record seasonally adjusted annual rate of 1 million in June, a 0.5 percent increase over May.

New claims for unemployment insurance dipped to a 17-month low, a signal that the pace of layoffs is slowing.

Other positive factors include short-term interest rates, which are at 40-year lows; virtually nonexistent inflation; and energy prices that have stabilized.

What's more, Federal Reserve Chairman Alan Greenspan recently gave the economy the thumbs-up, saying he expects it to grow as fast as 3.75 percent this year, above the average rate of growth.

"The economy is doing very well," said Carpenter, the ASB Capital economist. "We have pulled ourselves out of our nose dive.

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