DO ELECTIONS SWAY FED MOVES?
Apparently only in their timing
Will the fact that 1996 is a Presidential election year affect Federal Reserve policy in the months ahead? According to Wall Street lore, the Fed tends to resist making policy changes during election years. Many observers also think it is less likely to tighten in such years.
The Fed's track record proves otherwise. Since 1972, reports economist John Youngdahl of Goldman Sachs & Co., the Fed on average has actually made somewhat more policy shifts in election years than in other years. And tightening moves were also more common--probably because economic growth in election years was quite strong.
Youngdahl did find, however, that policy shifts were far less frequent in September and October (and more frequent in November and December) than in other years--indicating that the Fed tends to defer moves as elections approach until after the votes are counted.BY GENE KORETZReturn to top
A PANG OF ECONOMIC ANGST
Germany's revival has stalled
The economic news in Germany is anything but reassuring. After posting no growth in the third quarter, the economy dipped 0.5% in the fourth and seems likely to decline in the first, as well. Meanwhile, unemployment hit a postwar high of 11.4% in February, as an inventory correction, weakening capital spending, and declining construction took their toll of economic growth.
The most positive development is rising exports, which seem poised to lead the economy out of recession--despite the hurdles posed by a strong mark, high wage settlements, and sluggish European economies. Ralph Peters of Aeltus Investment Management Inc. thinks Germany's surprising export performance derives from the superior quality of German capital goods and manufacturers' foreign investment strategy. "To save on labor costs," he says, "German exporters may be shipping partially assembled high-value products to new plants overseas."BY GENE KORETZReturn to top
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BEWARE THOSE HEFTY JOB GAINS
The economy may not be so robust
Bond holders are still counting the costs of the surge in bond yields sparked by February's unexpectedly strong job numbers. But David H. Resler of Nomura Securities International Inc. has a sickening sense of deja vu. "It's all too familiar," he says.
Exactly six years ago in 1990, notes economist Resler, employment soared 602,000 during January and February after recording a gain of only 810,000 in the last half of 1989. Concluding that the economy was reviving after a year of lackluster growth, the Federal Reserve suspended further easing moves, and panicky investors pushed bond yields up by 88 basis points above their December level--more than enough to choke off interest-sensitive sectors.
The present-day parallels are striking. After total job growth of only 824,000 in the last half of 1995, employment posted a cumulative gain of 517,000 in the first two months of 1996. Several Fed officials have hinted that further easing is on hold. And 30-year bond yields are up sharply since the start of the year.
As Resler sees it, the recession in mid-1990 proved that the markets overestimated the economy's basic strength early in the year and thus helped bring on the downturn. Further, he notes that January-February employment gains have been unusually strong in most years since 1983--suggesting a systematic early-year tendency to exaggerate employment and economic strength. (Payroll gains in the first two months of the past three years averaged 515,000, but real first-quarter growth in those years averaged a paltry 1%.)
Of course, no one yet knows whether underlying business conditions this year are improving as much as recent job data imply. But the events of 1990, warns Resler, suggest that the latest interest-rate surge could well choke off any revival that is under way.BY GENE KORETZReturn to top