News Analysis: US Stock Markets Remain Vulnerable despite the Robust Economic Outlook ; the Dow Jones' Recent Roller-Coaster Ride Showed Just How Sensitive New York Shares Are

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THE UNITED States economy is heading towards the longest boom in history. Inflation is low, wages are rising at a moderate pace, and every economic forecast says that things are heading in the right direction.

The IMF forecast last week says that America is going to have a soft landing, with no rapid collapse in growth or sudden burst of inflation. So why is the stock market so unhappy?

The fear stems not so much from any concern about new information on the macroeconomy as from a series of interlinked factors that could upset the financial basis for the strong US recovery. The dollar has showed unforeseen weakness against the yen, and the Federal Reserve, having raised interest rates twice this year already, has hinted that it might move them again when it meets next week.

On Tuesday, stocks had a hair-raising ride in New York with the Dow Jones Industrial Average down more than 200 points at one stage only to recover later in the day to end down 27.86. At its lowest, it was just 80 points above the 10,000 mark, through which it so boldly soared earlier in the year to much fanfare. Both the Dow and the S&P 500 were, for much of the day, more than 10 per cent down on their high for the year, the point at which analysts start talking about an official market correction.

Yet the underlying economic figures continue to be positive, after all. The durable goods figures released yesterday showed a continuing strong demand for new aircraft and cars, the fourth month in which orders advanced strongly.

The manufacturing sector is still showing new signs of life. Exports may be picking up as the Asian economies return to strength and Europe stirs. The Conference Board said its register of consumer confidence slipped again in September for the third consecutive month, but it still expects a robust holiday season at stores.

The dollar's weakness against the yen was the subject of intense discussions at last weekend's Group of Seven meetings, and some commitments from Japan did emerge.

The market still fears that the dollar's strength is a thing of the past, despite robust statements from Lawrence Summers, the new US Treasury Secretary. The IMF, in its forecast, projected a dollar decline that would help to correct the trade deficit, even though that decline should be slow and orderly, it said.

In fact, with evidence that the domestic economy is slowing, it seems increasingly unlikely that the Fed will raise rates again when it meets next week. Indeed, some economists believe that the Fed should be moving faster and further.

The Shadow Open Market Committee, a group of private economists, made a rare reappearance on the public stage this week urging more attention to inflation and less on productivity gains.

"They ought to get about their business and stop making excuses as to whether productivity is higher or lower," said Allan Meltzer, a professor at Carnegie Mellon University who is the committee's chairman.

And Fed officials have also been making reassuring comments on other matters. …