Soft Landing in a Spoiled Nation
Americans quickly come to think of pleasures as entitlements, so as the gaudy economic expansion encounters turbulence, they seem not just stunned but affronted. The stock market, however, is simply doing its job, reallocating capital from unproductive to more productive uses. This is, so far, what a soft landing of a high- flying economy looks like. And the vocal angst of many investors is what a soft landing sounds like in a spoiled nation that is becoming the crybaby of the Western world.</br></br>Economic expansions are not like human beings and light bulbs. Expansions do not inevitably expire of natural causes. They could continue indefinitely, absent policy blunders by government or major mistakes by sizable elements of the private sector. The latter sort of mistakes have been made, particularly in overinvestment in technology and dot-com sectors. But government has two powerful levers for moving the faltering economy--interest rates, which are high, and fiscal policy, which is tight because government is running a surplus. Interest rates and taxes can be lowered.</br></br>Anyway, America's long expansion may not be over. Housing starts are up, the job market remains strong, and some producers' difficulties are consumers' delights: AT&T has cut its dividend for the first time in 113 years, and its stock is down 60 percent, but, then, long distance rates have fallen 35 percent in seven years, and cell phone rates even faster--in effect, a huge transfer of wealth from producers to consumers of those services.</br></br>Third-quarter growth (2.4 percent) was less than half the second- quarter rate (5.6), and sobering economic indicators have been multiplying for many months. Sobriety--a virtue, lest we forget--was producing dot-com carnage last spring. Investors were at long last pulling back from valuing companies for prospects--often chimerical-- rather than profits, and were belatedly acknowledging that, ultimately, profits dictate share prices.</br></br>On Oct. 12, in a sell-off unrelated to technology, the Dow began falling 379.21 points (3.6 percent) minutes after Home Depot, one of Wall Street's top growth stocks and a bellwether of consumer spending, warned that third-quarter earnings would fall short of analysts' expectations. Home Depot's stock plunged 28 percent because the firm's growth was 4 rather than 7 percent. But 4 percent is hardly agony. Besides, the analysts who set expectations sell stocks- -so they sell expectations. Furthermore, Home Depot ascribed its disappointment to the happy fact, for consumers, of falling prices of some building products. For example, during the summer, when housing starts slowed, sawmills did not, so lumber prices fell.