A Wealth of Upbeat Signals

By John Greenwald

Evidence mounts that the doldrums are finally coming to an end

New Year's Eve revelry began early for the U.S. economy last week. It arrived amid growing signs that the economic doldrums of the past six months are coming to an end. The mounting evidence strongly enhanced the holiday mood. Said Edward Yardeni, chief economist for Prudential-Bache: "There is no reason to fear a recession."

The loudest cheers over the brightening outlook came from Wall Street, where stocks had been sliding. On Tuesday the bulls broke loose again: the Dow Jones industrial average jumped 34.78 points, to record its best gain since Aug. 3; and more than 169 million shares changed hands on the New York Stock Exchange, making it the sixth heaviest trading day ever. Said Harry Laubscher, a Paine Webber market analyst: "The bears had Thanksgiving, the bulls Christmas." After the big jump, profit takers moved in, and the market dropped for three straight days. Nonetheless, the Dow Jones average ended the week at 1198.98, up 23.07 points.

Investors were largely responding to a slide in interest rates. The key federal funds rate, which banks charge one another for overnight loans, fell more than a percentage point Tuesday, to around 6.65%. The interest on Treasury bills also tumbled. Encouraged by such declines, Manufacturers Hanover and Bankers Trust cut their prime rate from 11 1/4% to 10 3/4%, the lowest level in 16 months.

The falling cost of borrowing reflects the Federal Reserve Board's willingness to increase the money supply and keep the recovery rolling. "The Fed is taking extraordinary steps to ensure that the economy picks up momentum," said Wayne Lyski, a vice president of Alliance Capital Management Corp. Members of the Open Market Committee, the Fed's policymaking arm, met behind closed doors early in the week to discuss monetary strategy. On Friday after the stock market closed, the Federal Reserve lowered the rate it charges on loans to commercial banks, from 8 1/2% to 8%. The Fed was charging 9% for such discount-rate lending a little more than a month ago.

The economy sent out encouraging signals of its own last week. The Commerce Department estimated that the gross national product grew 2.8% during the fourth quarter. That so-called flash figure exceeded expectations that growth would be in the 1.5%-to-2.5% range. At the same time, Commerce underscored the sharpness of the third-quarter slowdown by adjusting its estimate of that period's G.N.P. gain from 1.9% to 1.6%. The Government also reported that the November consumer price index rose at an annual rate of 2.7%, the smallest increase since June. Meanwhile, Americans' personal income rose a vigorous .7% in November, while consumer spending climbed a healthy .9%.

The economy, though, is hardly free of problems. The mountainous budget deficit, which is now more than $200 billion a year, remains a long-term menace. Another deficit--the shortfall between the amount of goods the U.S. imports and what it exports--also seems out of control. The Commerce Department reported last week that one sign of the trade gap, the current account deficit, swelled by a record $32.9 billion in the third quarter.

The widening trade shortfall damages U.S. companies and arouses increasingly strident calls for protection. The Reagan Administration heeded one of the shrillest last week by announcing voluntary restraints on steel imports. It reached an agreement with seven nations, including Japan, Korea, Mexico and Brazil, that will help to shrink the foreign share of the U.S. market for steel from 26% to 18.5% during the next five years. Reagan promised American steel producers before the election that he would negotiate the cutbacks.

The long-term economic outlook also brightened last week because of OPEC, which met in Geneva in another effort to defend its sagging oil prices. During the 1970s, the upward pressure that the group exerted on energy costs was a major cause of world inflation. Now, however, OPEC's official contract price of $29 per bbl. is regularly undercut by several dollars on the spot market, where an increasing amount of the world's crude is traded on the basis of supply and demand. Britain and Norway, two important OPEC competitors, have already begun to peg their prices to the spot market.

Beset by such problems, OPEC ministers spent much of their time blaming one another for cheating on prices and exceeding production quotas. They then recessed until after Christmas, when they plan to come together to devise a tougher system for policing agreements among themselves. Some experts who followed last week's session feared that OPEC'S troubles could ignite a price war that would disrupt the world economy by suddenly sending oil as low as $20 per bbl. For now, though, the cartel's woes seemed just one more cause for year-end jubilation.

--By John Greenwald. Reported by Lawrence Malkin/Geneva and Raji Samghabadi/New York

With reporting by Lawrence Malkin, Raji Samghabadi