Despite Friday's wild, anxiety-ridden plunge in the financial markets, analysts generally say current economic conditions don't warrant such stomach-turning swings and that the United States is headed for a period of modest growth, with only minor increases in inflation and interest rates.
The recent financial turbulence is an echo of the Oct. 19 stock market debacle, when most economists scaled down their expectations of economic growth while sticking to the view that the economy would survive 1988 without a recession. Friday's "mini-meltdown" is not seen as a big enough event to change that widely held outlook, according to those interviewed.
These expectations of growth, albeit sluggish, underscore the vast gulf between those who focus on the "real" economy of factories and inventories, and the skittish financial world, where the expectation that interest rates might edge up lately has triggered pandemonium.
'No Convincing Proof'
"I don't think we should now say, 'We're going to have a recession,' " said Duane Paul, a Bank of America economist, referring to Friday's stock market plunge. "We don't feel that way. We've seen no convincing proof at all."
Professional traders may think they're interpreting events carefully and logically, he said, but their response to economic news can amount to "extreme overreaction."
On Friday, for example, the markets treated a report of exceptionally strong job creation and employment in December--which would seem like good news for the real economy--as something awful. The Dow Jones average of industrial stocks plummeted 140.58 points, its third worst point loss ever. Investors also sent the bond market reeling, out of the fear that tightening labor supplies would lead to higher inflation and interest rates.
"You've got a lot of people who are real jittery--a lot of people jumping around on short fuses," said Thomas D. Stevens, chief investment officer for Wilshire Asset Management in Los Angeles.
Jitters aside, it's true that the economy faces a rogues' gallery of problems that could combine to topple it, among them a precarious dollar and towering deficits in trade and the federal budget. Business executives, aware of these concerns, wonder whether consumers will become less willing to part with their money, pulling the economy downward into a slump.
Forecasts Cut Back
The scenario of a shell-shocked consumer became popular among analysts immediately after the Oct. 19 stock market crash, an event that caused virtually all forecasters to trim their growth predictions for 1988.
Yet there is no proof that either the consumer has lost heart or that business executives have pared down their spending plans. To the contrary: an impressive array of evidence suggests the economy has entered the new year with surprising vitality.
Employment is at extraordinary levels. Inflation appears under control. After years of setbacks, U.S. manufacturers are reconquering some foreign markets. And while investors have some cause for nervousness about rising prices and interest rates, there is little to suggest such increases will be severe.
To the surprise of many, most of the economic indicators in recent weeks suggest the economy cruised beyond the Oct. 19 crash without losing a step--or at least not a very large one.
"There's very little to indicate the economy is going into some sort of contraction," said Rod Swanson, a vice president and senior economist with First Interstate Bancorp. "The evidence just isn't there yet."
On Friday, for example, the Labor Department offered striking evidence of economic strength in its report that unemployment in December fell to its lowest level in 8 1/2 years. In previous weeks, the government had reported respectable retail sales at large stores during the holiday season, strong levels of industrial production and robust plans for expansion by business executives.
Steep Slide in Index
A notable exception came in late December when the Commerce Department reported an unusually steep slide in the index of leading economic indicators for November. Analysts point out, however, that three consecutive monthly drops are believed to foretell a recession, and many see the November drop as a fluke related to the stock market crash.
"This (December employment report) confirms what we've been seeing in auto sales reports, in reports of higher chain-store sales," said David Wyss, an economist with the Data Resources Inc. consulting firm in Lexington, Mass. "There is just no evidence yet that the stock market crash has done anything to the economy."
Inflation, meanwhile, has stayed relatively tame. Consumer prices rose at an annual rate of 3.8% in July through November, 1987, a lower rate from earlier in the year when when oil prices were pushing inflation higher.