Economists smile as Wall Street picks up
Boston — The stock market upturn should give a boost to the economy.
That's what economists reckon. Alan Murray of Citibank, for instance, believes that, by increasing investors' assets, higher stock prices should encourage people to step up their spending.
Otto Eckstein, president of Data Resources Inc. (DRI), an economic consulting firm based in Lexington, Mass., says, ''The drop in interest rates and the surge in the stock market greatly improve the chance for a second-half recovery.''
A rise in stock prices, he adds, ''makes people feel better. It makes them wealthier. That should help a little.''
A bull market makes economists feel better, too. They regard stock prices as a leading indicator; that is, a statistical series that moves up in advance of economic recovery. ''We have never had a recovery that has not been preceded by a good stock market,'' noted Allen Sinai, a colleague of Dr. Eckstein's at DRI. That has been so at least since World War II. Before then, the stock market on occasion rose after, or at the same time as, the general recovery. Economists have been anxious this year about their widespread forecasts of recovery because , until last month, the stock market was slack. Its surge pushed the Dow Jones industrial average above 900 on Tuesday.
The usual lag between a stock market recovery and an economic recovery is four to six months. Nonetheless, Mr. Sinai now confidently predicts that the recession has bottomed out and should turn up ''sometime after Labor Day.''
A healthy stock market's biggest economic effect, though probably not large, is on consumer confidence. Citibank's Mr. Murray figures consumers could spend more if they chose to. Because of a combination of lower inflation, the high level of interest income, and federal tax cuts, he notes, the purchasing power of after-tax incomes increased fully 2 percent between July 1981 and July of this year.
''This is an impressive gain when viewed against the backdrop of a 2.3 percent decline in real GNP (gross national product in constant dollars) between the third quarter of 1981 and the second quarter of 1982,'' he writes in the New York bank's publication, Economic Week.
Moreover, consumers have stepped up their savings rate. That's the percentage of after-tax income left over after buying goods and services and making interest payments on installment credit purchases and other types of business debts (apart from those paid for home mortgages). The savings rate, Mr. Murray notes, averaged 6.9 percent in the year that ended in June, up from an average of 5.8 percent in the prior year and a half. In July it jumped to 8.1 percent, since households were slow to spend their extra income from higher social security benefits and reduced income taxes.
On the other hand, declining house prices tend to offset to some degree any sense of affluence resulting from higher stock prices. ''We need a firming in real estate prices and home prices,'' Mr. Sinai said.
Dr. Eckstein adds that a rising stock market usually correlates with rising consumer sentiment - which is measured in surveys. More-confident consumers will presumably spend more.
He says a booming market tends to go together with increasing presidential popularity, too. So, presumably, the bull market should help the Republicans in the fall elections - if congressional candidates can ride somewhat on presidential coattails.
But Dr. Eckstein cautions, ''Most of the stock market participants are for Reagan anyway.'' And, he continues, it is a little late for an economic recovery to help the Republicans, as there will be only two months of positive data reported before the electorate troops to the polls. Nonetheless, he admitted, ''He (President Reagan) can say things are getting better.''
A secondary economic effect from rising stock prices is that it reduces the cost of capital. Corporations get a higher price if they issue new stock, and thus they need pay less in the way of dividends for the amount of money raised. The amount of new stock currently being sold to investors is relatively small, however.
Declining interest rates are also encouraging to economists. Dr. Eckstein pointed out that the dramatically lower short-term interest rates reduce the cost to business of holding inventory. This, he says, ''should alleviate distress selling and allow (business) buyers to take a somewhat more positive attitude toward restocking. Production, therefore, should turn up soon.''
He calculates that the decline in mortgage rates to nearly 15 percent in many areas should restore housing affordability to several hundred thousand potential buyers. But, he says, rates are ''still much too high to develop the mass market for single-family homes.''
Businessmen are not considered likely to take advantage of lower interest rates to increase spending on new plant and equipment because they already have a large amount of surplus capacity.
Another encouraging note for economists been the July increase in the Commerce Department's index of leading indicators. It surged ahead 1.3 percent, its fourth consecutive monthly gain. The index is the government's principal barometer of future economic activity.
Some of the latest data has not been so encouraging, however. Automobile and retail sales have been poor. Unemployment rose from 9.5 to 9.8 percent in July. Citibank suspects the jobless rate might move even higher when the August figures are released Friday. Industrial production edged down in July, and could be down again this month. But housing starts have moved up, partly because of a rush of projects approved under an expiring government subsidy program.
Nonetheless, with the stock market recovery, economists' spirits and hopes for the economy are lifting.