Market yawns at budget cut -- tax cuts pose a threat

By , Business and financial correspondent of The Christian Science Monitor

Last Thursday the hushed House of Representatives watched a budget plan supported by President Reagan pass by a stunning majority. In the gray canyons of Wall Street, 200 miles to the north, was there celebration? Did stockbrokers slap each other on the back and were financiers cheered that better economic times might soon be upon us?

Yes and no. Wall Street strongly supports the President's efforts to curb government spending. But the House action had been expected -- and the Street is concerned that Reagan's tax cuts might spur inflation.

"To a certain extent, the [House vote] had already been taken into account," says Monte Gordon, director of research at Dreyfus Corporation. "The Street has been focusing more on the tax cuts. They|re concerned about inflation, especially since the economy has been so strong."

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One measure of the economy's strenght, installment debt, rose $3.11 billion in March, according to figures released late last week. That's the largest monthly increase in more than 1 1/2 years, though much of it was accounted for by rebate-inspired auto sales.

In any case, the Wall Street view is that the tax cut, slanted heavily toward individuals, would shovel dollars onto an economy still burning stronger than anyone could have predicted -- thus sparking another surge in the inflation rate.

Wall Street is also glancing askance at the predicted federal deficit. Treasury Secretary Donald Regan recently estimated that the government would run about $60 billion in the red this fiscal year if the President's economic recovery program passes with its tax and budget cuts intact. Money managers are concerned that this deficit would sop up capital like a sponge, drying the credit markets so that there's not enough left for private industry.

"I suspect that inflationary expectations will not be curbed by the slowing in the growth of federal expenditures; expectations will remain high because the financing requirements of the government will remain high," said Henry Kaufman, a partner in Salomon Brothers, at a luncheon meeting in April. And the market's skepticism is already giving the government problems. On Thursday the Treasury was forced to offer 13.99 percent -- the highest yield ever -- before it could sell an issue of 30-year government bonds. Earlier in the week, 3- and 10-year notes also established record yields (15.81 percent and 14.56 percent, respectively).

That means US taxpayers are having to pay more than ever before to finance the government debt.

For the Treasury, "I can't think of how the week could have been any more expensive," says David Jones, vice-president of Aubrey G. Lanston, bond specialists.

The Treasury may have partly brought the problem on itself by peering too closely over the Federal Reserve Board's shoulder. Criticism by Beryl Sprinkel, Treasury undersecretary for monetary affairs, was a major reason that the Fed reacted so strongly to the money supply surge of several weeks ago, Mr. Jones says.

The Fed raised its discount rate to a record 14 percent to drain reserves from the banking system and keep down money supply growth. This started a chain reaction of rising interest rates -- resulting in the high yields the Treasury itself was forced to pay.

Jones claims the whole thing was an overreaction, anyway, and that the money-supply blip was not caused by laxity in the Fed's monetary policy, but by income tax payments pouring into the government's bank accounts.

As shown by the Treasury's problem, the long-term bond market remained moribund. Bond dealers, while maintaining that the President's program will be good for the country in the long term, are still not happy that the budget isn't supposed to be balanced until 1984.

"What a bond dealer says is, 'By 1984 I may be dead,'" Jones says.

If the administration is successful in sliding its economic package through Congress, budget uts, tax cuts, and all, what would the Wall Street reaction be?

"Assuming he got what he asked for," says Monte Gordon, "It would probably be a muted response."

A recent poll of consumers suggests that the economy is actually taking a breather but will get up and start jogging again later in the year. The Conference Board's consumer confidence index, using 1969 as a index year of 100, stands at 74.3 for April. That's up from 70.9 in March. The upward move indicates that consumers are starting to feel better about the economy, says Fabian Linden, director of consumer economics at the Conference Board.

"Based on the record, the decline in consumer expectations, which began this December and continued through February, suggests that the country's real economic growth rate will subside considerably in the second quarter and perhaps the third quarter as well. But the recent upturn in consumer confidence, both in March and April, points to a strengthening in US business conditions later in the year," Mr. Linden says.

The Dow Jones industrial average, unimpressed by the Reagan budget cuts, went on a slow decline for the week -- closing at 976.40, off 19.19 points from the previous Friday. The prime rate led a general interest rate increase, leaping up a full point to 19 percent.

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