America's economic mood has shifted this year as fast as that of a weary toddler.
Right now, many economists are concerned that the economy is hyper - needing restraint by the long arm of the Federal Reserve through a hike in interest rates.
Last winter, it looked to some as if the economy was about to bawl - fall into a slump. But it didn't. Real growth ran at a slim 2 percent annual rate in the first quarter. In the spring, the gloom faded and something like economic laughter arose. By June, the glee was gone and quiet back.
And now? "It is just a matter of time before the Fed has to tighten monetary policy," says Charles Lieberman, chief economist of Chase Securities Inc. in New York.
Financial markets will be looking closely at today's release of employment numbers by the Labor Department for confirmation of a too-rapid-growth scenario.
Why these shifts in economic temper, changes that could have an impact on the presidential election in November?
One explanation is the Fed's very low growth target for the economy. In the current economic expansion, now 5-1/2 years old, the Fed has aimed for a modest growth rate of 2 percent a year after inflation. Since the economy is not always stable, whenever the growth rate drops below the target, economists and others quickly become concerned about the risk of a recession, says Christopher Low, a New York economist at the HSBC Group, a banking firm. When growth rises above 3 percent, investors worry that the Fed will put the brakes on to forestall a revival of inflation.
If real growth were running 3 to 5 percent, as it often has in previous recoveries, the normal variability of business activity would cause less excitement, economists note. A one percentage point shift in the growth rate would raise less fear of recession, or, alternately, of an inflationary boom.
Another reason for the mood swings is consumer behavior, says A. Gary Shilling, an economic consultant based in Springfield, N.J. Americans are shifting "back and forth between saving 5 percent of their take-home pay and 4 percent." Last winter it was 5 percent, as many consumers stayed out of the malls. In the spring, consumers "cleaned out the stores," as Mr. Shilling puts it, and the savings rate dropped to 4 percent. National output revived, to a 4.8 percent annual rate in the second quarter.
Mr. Low blames the economic ups and downs on shifts in inventory, reflecting changes in consumer purchases and industry output. Of course, such changes have occurred in the past. But in the low-growth environment, their impact is magnified.
Wall Street jumps at all data
Another mood-change culprit is Wall Street. "Financial market economists tend to be more volatile in their opinion than economists who work on the 'real side' of the economy," says Daniel Bachman, chief economist at the WEFA Group, an economic consulting firm in Eddystone, Pa.
When new economic data come out, financial economists must promptly decide whether to suggest buying or selling stocks or bonds. Prices of stocks and bonds can rise or fall sharply on a single new number. These swings and the views of financial economists grab news media attention.
Yet the statistics are not precise. They include a lot of "noise," as well as some genuine information about the economy. Those in industry or service activities often can afford, unlike those in the financial markets, to wait a month or two to see if further data confirm an economic trend.
Job growth may be unsustainable
At present, one sign of possible too-rapid growth is on the jobs front. Mr. Lieberman says the growth of new jobs this year is already above the "sustainable trend." The labor force is growing at a 1 percent rate, or about 110,000 to 125,000 people per month. But job growth has been averaging around 230,000 a month, a rate that would create labor shortages at some point, he says.
Contrary to Lieberman, Mr. Bachman expects the economy to slow over the next few months. He predicts the Fed won't alter interest rates until mid-1997, and then the move will be downward - to prop up weak business activity.
A report in The Wall Street Journal earlier this week out of a Fed-sponsored conference in Jackson Hole, Wyo., indicated that the Fed is leaning toward raising its short-term interest-rate target half a percentage point at its next meeting on Sept. 24, unless signs of a slowdown emerge.
Bachman expects Fed staff economists to advise policymakers to make no precipitous move, but to await confirmation of recent signs of fast growth in later statistics.
In six of the last 10 presidential election years, the Fed pursued a tighter monetary policy, not a neutral or looser policy, Shilling says. Still, a jump as large as half a percentage point in the federal funds rate (which commercial banks charge each other on overnight loans) shortly before the election would be a dramatic political as well as economic event.
Shilling says the Fed could do it because "many citizens don't know what the Fed is, let alone what it is doing." In addition, he notes, a hike in interest rates would not slow the economy for six months to a year - long after people voted. One risk is that a rate hike would send stock and bond markets into a tizzy, annoying voting investors.