- The Washington Times - Wednesday, May 12, 2004

Wall Street’s depressing stock sell-off, despite an economy bursting with growth, has cast a pall of gloom over what should be a balloon-popping party.

And it isn’t helping George W. Bush’s re-election prospects, either. In the face of healthy corporate earnings, beating analyst expectations, mushrooming job creation, a robust housing market, rising manufacturing orders, relatively tame inflation (if you exclude energy costs), and strong consumer spending, Wall Street is acting as if the U.S. is about to enter another recession.

Analysts say the reason for the financial market’s bearish mood, which pushed the Dow down to below 10,000 Monday for the first time since December, has been fear of the Federal Reserve’s intention to eventually raise interest rates. But many interest rates, such as mortgage rates, have already been rising in anticipation of the Fed’s action without any harmful dimunition in the housing markets. “We can’t build them fast enough,” a housing industry spokesman said last week.

Indeed, the likelihood of higher home mortgage rates will stimulate even faster housing sales as home buyers seek to lock in lower rates.

Moreover, Fed Chairman Alan Greenspan has said that any rise in interest rates will be phased in slowly so as not to impede the economy’s 4 percent-plus growth rate. It should be noted that rates were much higher in the mid-1980s when the economy took off in response to the Reagan tax cuts. So I do not see any serious fallout from the Fed’s action. It will be offset by the huge wave of mortgage refinancings during the past three years, which sharply boosted homeowner liquidity.

Besides, a gentle interest-rate braking of inflationary pressures wouldn’t hurt a go-go economy and clearly this is an economy that has a strong tail wind behind it, creating jobs like nobody’s business: 288,000 in April and 338,000 in March. Look at these longer-term numbers:

• More than 1.1 million new payroll jobs in the last eight months —867,000 jobs in the last four months alone.

• Manufacturing jobs are coming back, too, with increases in the past three straight months.

• Weekly jobless benefit claims continue to decline. They were down by 25,000 last week and are at their lowest level since the fall of 2000.

• The unemployment rate has fallen to 5.6 percent — well below the 6.3 percent peak of last summer.

These numbers should send a bullish signal to Wall Street because growing employment feeds on itself, producing higher incomes, which spurs consumer spending, leading to stronger business sales and eventually higher profits and subsequently, more jobs.

But it is clear that other things are rattling the financial markets besides Mr. Greenspan’s intention to raise interest rates sometime this year.

If there is anything Wall Street hates more than higher interest rates, it is geopolitical instability. And there has been a lot of that in recent days and weeks: Increasing turmoil in Iraq, triggered by the growing insurgency, the prisoner abuse scandal that has put the White House on the defensive, rising pressure on Defense Secretary Donald Rumsfeld to resign (despite polls showing that two-thirds of all Americans think he should stay on the job), and the assassination of the Chechen president.

Throw in $40 a barrel oil, $2-a-gallon gas prices and another terrorist attack on Iraq’s oil pipeline and you have a poisonous global brew that is shaking up financial markets from New York to Tokyo.

Mr. Bush’s decline in the polls (to the high 40s) is another factor in all this. Wall Street wants Mr. Bush re-elected and any sign that his political viability is weakening undermines the market’s confidence.

“The market rises and falls with the Bush administration’s approval rating,” said Matt Johnson, managing director of stock trading at Lehman Brothers.

The one reassurring constant in all this is the underestimated strength of the U.S. economy which I believe will weather these geopolitical storms and lead the global economy to new heights. Some other external factors are going to help, too. Among them:

Saudi Arabia’s oil minister announced Monday that he will urge OPEC to increase oil production, which will reduce oil prices and, eventually, gas prices at the pump. European Union officials, in a major move that could herald lower trade barriers and a stronger global economy, offered to end subsidies for farm exports if other countries did likewise.

Meantime, the U.S. will hand over control of Baghdad’s government to the Iraqis on June 30, putting them in charge of their country’s future. How they handle it remains to be seen, but it will send a welcome signal that we want them to run and control their own affairs as a free people and that, in time, the U.S. military occupation is going to end.

The prospects of declining oil prices, falling trade barriers and the birth of self-government in Iraq should do wonders for the stock market, not to mention George Bush’s chances for re-election.

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

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