Unexpected Signs of Health

Spring brings a Wall Street rally—plus hints of recuperation elsewhere

The economy last week behaved like a long-term invalid who has trouble believing his doctor's reports that he might actually be getting better rather than worse. Despite some conflicting symptoms, the economy continued to exhibit much more vigor than most observers had thought possible. This year, after all, was once widely expected to produce another recession. To be sure, some Cassandras, including several top officials in the Reagan Administration, warned that the economy's improvement was largely illusory and that a renewed bout of business stagnation might hit by this summer.

The clearest sign of good cheer was a stock market rally that sent the Dow Jones industrial average surging last Wednesday to 1,015.22, an eight-year high. The market eased off later to end the week at 994.78. Wall Street has been strong since last fall, when polls showed that Ronald Reagan might defeat Jimmy Carter and bring a more pro-business atmosphere to Washington. Says Monte J. Gordon, research director for Dreyfus Corp., a large New York investment firm: "Reagan has been an aphrodisiac for the market."

Wall Street economists generally feel that business looks much stronger now than a few months ago. Gary Wenglowski, director of economic research for the investment banking firm Goldman Sachs, previously predicted that the economy would dip in the first half of 1981. But now he foresees a "less severe slowdown that will not be deep enough or long enough to call a recession." Agrees Roger Birk, chairman of Merrill Lynch, the largest brokerage house: "This is not a recession year; it is a transition year."

Even Detroit, now slogging through the auto industry's third year of depression, had reason to celebrate last week. Domestic auto sales during the middle ten days of March jumped by nearly 30%. Of the three largest automakers, only Ford continued to suffer a sales decline, while Chrysler and General Motors sales were up sharply. The sales spurt, no doubt sparked by the industry's rebate deals, showed that the American public is willing to buy Detroit's products when the price is right.

The best evidence of the economy's vitality was the preliminary figure for the gross national product in the first quarter. Administration officials project an increase in the G.N.P. at an annualized rate of 5%. Although few forecasters expect the economy to maintain that relatively torrid pace throughout the year, Otto Eckstein, president of Data Resources, a business consulting firm, believes that the first quarter's results were a sign that the economy may slow down but will not contract this year. Says Eckstein: "I don't see any negative quarters."

The economy will be further buoyed by the recent decline in interest rates. The prime rate, the price for loans that banks usually charge their best corporate customers, declined last week to from 17% to 17.5%; it started the year at a record high of 21.5%.

So far, however, the decline in interest rates has been limited to short-term loans. Long-term interest rates, which affect consumers through home mortgages, remain at near record levels—a disturbing sign that financiers are not yet ready to bet heavily that inflation will subside in the next few years.