Wall Street 'Spin Doctors' Inflate Economic Outlook

INVESTORS should be on guard against efforts to manipulate interest rates through one-sided interpretation of economic information. For example, did the number of people at work in nonfarm jobs (a) rise modestly in May or (b) post a record decline? Believe it or not, according to the Labor Department, both statements are true. The answer depends on which of two competing measures of the job market you prefer. Wall Street spin doctors - and their friends in the fourth estate - focused exclusively on a modest gain of 59,000 in the number of payroll jobs last month and ignored a record drop in total nonfarm employment.

Incentives to manipulate the news are ample. An expanding economy normally generates rising demands for credit, a higher rate of inflation and higher interest rates. It's easy for Wall Street players to make money trading options that increase sharply in value when rates go up and bond prices go down. Why not make the business outlook appear rosy?

Long-term investors should not confuse such speculative games with economic fundamentals. While there are plenty of preliminary indications that the recession is likely to end soon, the record drop in employment last month was a grim reminder that the slump is not over yet. The lingering pockets of weakness will be painful for people on the unemployment line. It is always darkest just before dawn.

Not only is the economy still weak, but private demand for credit has largely disappeared. Inflation is very low. The rate of increase in the Commerce Department's "personal consumption deflator for goods probably the best measure of the cost of things that people buy - was under 1 percent over the last six months.

The Labor Department reported that its regular monthly sampling of the nation's households showed that the number of people at work in nonfarm jobs came to 113.3 million last month, down 924,000 from the prior month. That was the largest monthly drop in United States history. Analysts at the Labor Department tried to explain away this huge decline as simply an offset to a big jump in April.

However, taking April and May together, the number of people with jobs dropped by average of 169,000. That was slightly higher than the average monthly drop in employment since the recession began last July.

Moreover, unemployment is still rising rapidly. An average of 8.5 million persons were out of work during March, April, and May. That represented a compound annual rate of increase of 39 percent from the average of 7.8 million in the three months ended in February.

The government's payroll data are based on a survey of business establishments. They determine the number of jobs. By contrast, the households survey measures people who have jobs. Over a year or more, the two series provide similar pictures of the economy. Over shorter spans, they often diverge. The household data, for example, gave the first clear indication that a recession was brewing last year.

Wall Street analysts generally believe the payroll figures give a better view of the economy, in part because Federal Reserve chairman Alan Greenspan uses these numbers to set monetary policy. But the payroll data are subject to substantial error. The Labor Department admitted last week that during the past two years it inflated the number of jobs at private service firms by over 500,000.

Mixed signals from the employment line are not the only signs of lingering weakness. Major retailers reported that their dollar sales were about the same in May as in April. However, if the normal seasonal pattern had prevailed, sales would have risen approximately 7 percent. Thus, seasonally adjusted, sales were down substantially. Here, too, the spin doctors looked only at the good economic news and ignored the bad.

Meanwhile, the Federal Reserve is playing its typical role in ending the recession. Conventional wisdom in lower Manhattan is that Fed policy is currently "on hold." This view is incorrect. Federal Reserve actions have resulted in a progressive easing of policy. The mean month-to-month change in the money supply (using the narrow "M-1" definition) during the first five months of 1991 was 8.2 percent, up from 4 percent in 1990. That's classic stop-start monetary policy. For all his rhetoric against infla t

ion, Mr. Greenspan is no different from his predecessors.

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