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Analysis: Bad news is good for Wall Street Thursday, 12 April 2001 18:08 (ET)

By IAN CAMPBELL, UPI Economics correspondent

WASHINGTON, April 12 (UPI) -- The market was awash with data and money Thursday. The news was bad and the markets were strong. Retail sales and unemployment numbers showed a weakening economy. Money growth numbers confirmed that the interest rate cuts urged on by Federal Reserve Chairman Alan Greenspan are pumping money into the economy at an astonishing pace.

Wall Street took the bad news happily. It is confident that Greenspan will send more money.

Thursday the Labor Department reported that 392,000 workers applied for initial unemployment benefits in the week ended April 7, a rise of 9,000 from the previous week and the highest level since March 1996 when claims reached 397,000. The four-week moving average of unemployment claims, a more reliable indicator than the weekly series, confirmed the worsening trend. It rose to 380,500, the highest level since April 1996.

Also Thursday, March retail sales came in below expectations, falling 0.2 per cent. Retail sales growth has been volatile in recent months. In January retail sales rose 1.3 parent and contributed to the revival of optimism on Wall Street. The sense then was that the slowdown in the economy in the fourth quarter might be ending.

But now, if the monthly figures are considered together, retail sales have risen by just 0.6 percent in the six months from October 2000 to March. Excluding autos, the rise over the same period is an also miserly 0.9 percent. This is not enough to keep U.S. factories humming.

Consumer demand is falling off as layoffs, rising unemployment and reduced hours worked by those still in work begin to take their toll on confidence. It was also reported Thursday that the University of Michigan's Consumer Sentiment Index fell to 87.8 in April from 91.5 in March, according to preliminary figures. The index has dropped from 107.6 in November 2000.

This Michigan survey contradicts the most recent trend in the Conference Board's consumer confidence survey. Having plummeted from 142.5 in September to 109.2 in February, it had bounced back in March to 117, suggesting that the fall in confidence had bottomed out.

Thursday's bad news was music to Wall Street's ears. The Dow and the Nasdaq rose again, extending their recent good run. Having closed as low as 1,639 April 4, the Nasdaq has climbed by almost 20 percent in little more than a week. The Dow closed at 9,389 March 22, but was up almost 8 percent from that when it closed Thursday.

Bad news is good -- when it suggests that interest rates might be cut again. Yet more data released Thursday favored that sunny interpretation of prospects. The producer price index for March showed a fall in factory gate prices of 0.1 percent in March. Inflationary pressures are tending to ease because energy prices are falling back. This means that inflation is unlikely to prevent Alan Greenspan from cutting interest rates. That is why Wall Street has taken bad news today with its customary courage. It sees medicine on the way.

Yet Wall Street's hopes for an inter-meeting rate cut -- i.e. before the next Federal Open Market Committee meeting scheduled May 15 -- are unlikely to be fulfilled. Greenspan already has made one inter-meeting cut in rates this year, in January. To do so again would smack of panic and suggest that the Fed misjudged the economy March 20 when it cut rates by "only" 50 basis points (half of one percent), less than many on Wall Street were calling for. Nonetheless, on present economic trends another interest rate cut of 50 basis points does seem likely May 15.

And it would be a mistake, in our view.

In most countries the central bank pays attention not just to inflation, but to other excesses in the economy. One such excess might be an unduly large trade or current account deficit. The United States has record trade and current account deficits. Last week, Greenspan's criticism of the Japanese economy may have reflected a realization on his part that the U.S. economy needs growth elsewhere if it is to avoid a recession. At the moment, unfortunately, that is a vain hope. For Japan cannot grow without a strong U.S. economy.

European growth also is slowing. Yet the European Central Bank did not cut interest rates at its fortnightly meeting Wednesday. It wants inflation to fall before it cuts rates. It does not see its role as promoting high growth. It accepts the limitations of monetary policy.

Greenspan takes a bolder line. He is pumping money into the economy. Today it emerged that M3, a broad measure of the money supply, rose at an extremely rapid annualized rate of 12.8 percent in December to March. Even this is not enough for Wall Street. The U.S. stock market appears now to require an interest rate cut of 50 basis points at each Fed meeting, just to avert outright collapse.

Greenspan might do better to stop transfusing money into the economy, allow the slowdown to take its course and America's imbalances to correct themselves. Pumping money into the economy has its danger. It puts off the correction in the economy and probably makes it worse by doing so. And it threatens at some stage to send the dollar tumbling, creating some inflationary risk, even in a slowing economy.

The economy cannot always be booming. Yet were Greenspan to say that, Wall Street and probably the U.S. Congress would crucify him. The United States has become used to boom and demands it as its right. Its top central banker is pleased to be seen as the author of the boom and wants to keep it alive. Eventually, there will be a price to pay. -- Copyright 2001 by United Press International.

-- Swissrose (, April 13, 2001

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