The Economy Perks Along
Jude Wanniski
September 17, 1996


There are several reasons that the economy will continue its slow, steady expansion throughout the rest of this year and into next. The stock market in general and NASDAQ in particular are feeling comfortable with the near horizon, no longer worrying much about the Fed hiking interest rates to slow things down. Even the bears now concede that the Federal Open Market Committee will take a pass at its meeting next week, which means there won't be a rate increase prior to the elections. Our guess is that there won't be an increase for the balance of the year, because there should be nothing in the works to disturb the price of gold in this period, unless it inches its way down a bit more from its current $383. If gold were on the rise with business inventories building, as they are, Fed Chairman Alan Greenspan would be worrying about inflation. As it is, he can assume that the business community from the bottom up is getting more sanguine about prospects for final sales and is simply gearing up. This should be the best Christmas season in several years.

Although there are clear possibilities for an upset in the presidential election, even with the economy perking along, we must assume President Clinton will be re-elected on November 5. We would immediately see speculation, sponsored by the bears, that Greenspan will knock down the economy in order to get the tightening over and done with. There is that Beltway mindset, which is to take your medicine right after the elections, so the voters will forget about what you did to them by the time the next one rolls around. The Clinton tax increase of 1993 was predicated on this basic theorem. The Republicans were smart enough to vote against it unanimously, though, which is why voters remembered enough in 1994 to reward the GOP by turning out the congressional Democrats. One of the reasons the stock market is as strong as it is now is that there seems little chance of a tax increase in 1997, whomever is elected. Supply-side economics has made enough of a comeback to have impressed both political parties. Back in February, you may recall, we said the DJIA would climb past 6000 this year, purely on the strength of Steve Forbes getting into the GOP primaries and carrying the growth banner. (We said it would top 8000 if he won.)

We can be sure the bond bears will be calling for a rate hike on November 6. On the other side of the coin, we have those Fed governors appointed by President Clinton, who lately have been threatening to vote a rate hike to show their independence from politics. Fed Vice Chairman Alice Rivlin made no bones about opposing a rate hike in advance of the elections. She might tell Greenspan after the elections to go ahead and hike, that she did her duty to the President and the Party. Governors Laurence Meyer and Janet Yellen are in a different boat. They have already proven their political independence by making noises about a rate hike, until the numbers would no longer justify one in any case. After the elections, they are in a good position to vote against a rate increase on the grounds that it isn't needed. If Clinton is re-elected, Greenspan will be in such a strong position anyway that he could get the FOMC to do pretty much as he wishes. If gold behaves itself, so will the Fed.

Dole can pull an upset only if he forgets the crime and drugs issues. The President easily swats these aside, having prepared his defenses over the last year. In fact, Clinton is thoroughly fortified at his center and on his right flank. Dole is wasting time and money trying to crack through. Clinton, though, has his left flank totally exposed, assuming Dole would never think to attack it. The most exposed is the black vote, now 95% in Clinton's pocket, even though black leaders know he will slow down the economy as soon as it gets strong enough to pull up the real wages of black folks. Jack Kemp has been at that point of attack, promising rapid growth. If the Dole campaign gets serious about Clinton's vulnerability on the left, we then could expect to see the stock market and the economy perk along a little faster.