- The Washington Times - Thursday, July 13, 2000

If you were looking for a work of fiction that mirrors the behavior of Wall Street and the Fed, you couldn't do much better than the classic children's fantasy "Alice in Wonderland."

In many respects, life on Wall Street has been a lot like that silly upside-down world that Alice discovered when she tumbled down the rabbit hole. In is out. Up is down. Backwards is forward. In a world built on growth, it is now the rule that too much growth is bad because it raises the specter of Cheshire Cat inflation apparently only the Fed can see it. Less growth is now good, because it means the Fed will not raise interest rates which will, in turn, set the stage for further growth. Huh?

On the other hand, interest rates that are too high hurt businesses, and their reduced earnings drive down stocks. That means that interest rates need to be cut again to spur growth, and the whole madcap cycle begins anew, with Wall Street chasing after the Fed's version of the White Rabbit.

In this world, prosperity is bad. Economic malaise is good. And any new government report suggesting weaker growth is cheered. Are you with me on this?

Thus, for months Wall Street has been selling at the smallest hint of good economic news, but signs of economic weakness set off buying sprees. Declines in job creation are good, increased retail sales are bad. Falling GDP is in. Rising GDP is out. Such is the mixed-up world that Alan Greenspan, not Lewis Carroll, has invented.

But the funny thing about free markets is that they do not always behave the way government bureaucrats want them to. The profit-takers and day traders on Wall Street may act like Pavlov's dog, but America's free-wheeling economy seems to have a lot of growth left in it. At least that's what the latest real figures are telling us.

New factory orders shot up 4.1 percent in May, the biggest one-month increase since the 4.9 percent increase in December of 1992 (the year the news media kept telling us that the Bush economy was in a recession).

The spurt in factory orders was led by increased demand for electronic equipment, which jumped an incredible 26.4 percent in May. If you exclude the volatile transportation sector, factory orders alone rose by 4.3 percent, the largest increase since January 1980.

Meantime, machine-tool orders an important measurement of where U.S. manufacturing is headed rose a bullish 8 percent in May, showing increases in virtually all regions of the country.

Another set of numbers that suggest the U.S. economy is cruising along without any signs of inflation came from the Commerce Department, which announced that Americans are making more than they are spending. Incomes were up 0.4 percent, while consumer spending rose by 0.2 percent in May.

What are Americans doing with that extra money? Well, one thing they are doing is investing it. Stock funds grew by $25.9 billion last month, up 53 percent from May another bullish sign that Americans believe the stock markets are going to come roaring back.

To be sure, some sectors were weaker. Car and light-truck sales, which have been booming, fell 1.4 percent in June, the second straight monthly decline. Job creation slowed last month, too, although the 4 percent unemployment rate remains the lowest in 30 years.

Still, the biggest problem facing the economy remains labor shortages. Despite the Fed's anti-growth policies, businesses are desperate for workers. IBM, for example, just announced plans to hire 2,000 people and spend $2 billion to enhance its Internet computer programs. Corning, a maker of fiber optics for high-speed communications, is adding 700 new jobs at its plants.

There is no core inflation in this economy to speak of, not when the temporary oil price spike is removed. And the sooner the Fed begins to recognize this, the better off we'll be.

I agree with Wall Street economist Larry Kudlow that the Fed's interest rate hikes (the economic equivalent of bleeding a healthy patient) are rooted in the old-economy paradigm. It's a paradigm that is no longer relevant in the new high-tech economy, which is cutting costs and boosting productivity.

I'm betting that the lower core inflation numbers will eventually sink in over at the Fed this fall, and that its interest rate mania will peter out as oil and gas prices come down.

I'm also betting that American technology, still in its infancy, is going to come roaring back, and that the upcoming earnings reports are going to exceed Wall Street's forecasts. When that happens, money is going to pour back into the markets, and both old- and new-economy stocks are going to take off again like nobody's business.

Only this time, the market is going to be responding in a sensible way to signs of increased economic growth and to higher corporate earnings, not flinching in an "Alice in Wonderland" fear that the Fed will raise interest rates because the economy's too strong. That day can't come soon enough for me.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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