What a Way to Start a Year!

By John Greenwald

Bullish tidings gladden both moneymen and the Administration

A little more than a year ago, the U.S. was mired in its deepest and most painful slump since the Great Depression. Since then, the economy has been recovering rapidly, and upbeat indicators have become fairly common. But by any standard, last week's good news was simply dazzling. The economy seemed to be letting out a shout of joy that echoed from Wall Street to Main Street to Pennsylvania Avenue.

On Wall Street, investors went on a binge that pushed volume on the New York Stock Exchange to an alltime one-day high. Moneymen had been expecting a year-end rally, but it never materialized. Then the bull market came roaring out of its pen as if it were bent on starting another rampage. Said William LeFevre, a market strategist with Purcell, Graham & Co.: "This was the week investors stopped looking at higher interest rates and started looking at corporate earnings." Trading on Thursday reached 159.99 million shares, well above the old mark of 149.35 million set two days after the 1982 congressional elections. Mounting a serious challenge to the previous high of 1287.20, hit last Nov. 29, the Dow Jones industrial average climbed 28 points for the week and closed at 1286.64.

The Administration received good news in the form of the latest unemployment figures. The Labor Department announced that joblessness in December fell to 8.2%, down from 8.4% in November. Just a year earlier, unemployment had peaked at a post-Depression high of 10.7%.

The political benefits of the rapid improvement were hardly lost on the Reagan Administration. White House insiders are now confident that the business rebound will deny the Democrats the economy as an issue during this presidential election year. Said White House Press Secretary Larry Speakes: "The year 1983 proved to be one of promise as the economy produced nearly 4 million new jobs."

Retailers were also jubilant. With the holidays behind them, merchants were finally able to tot up their receipts, and the figures made very good reading. Christmas sales more than fulfilled expectations, and the 1983 holiday shopping season was the best in nearly a decade. Revenues of major stores were more than 10% higher than last year. Sears' sales improved 35%, while Minneapolis-based Dayton Hudson recorded a 25% gain. Predicted Dayton Hudson Chairman William Andres: "Consumer confidence will continue to grow, and we'll continue to see good retail sales in 1984."

Detroit also had reason to celebrate.

When automakers closed their ledgers on 1983, they reported sales of 6.78 million cars, a 17.9% gain over 1982 and the industry's best performance since 1979. Quipped Edward Yardeni, chief economist for Prudential-Bache Securities: "Consumers couldn't buy Cabbage Patch dolls, so they went out and bought cars."

Chrysler led the Big Three with a 21.7% increase last year, to 841,622 cars. Ford, which sold 1.57 million autos, climbed 16.8%. General Motors' sales of 4.05 million cars showed a gain of 15.3%. But the biggest improvement was made by American Motors on the strength of its highly successful Alliance subcompact. AMC sold 193,351 autos in 1983, a 72% increase over 1982. Last week American

Motors reported that it made money in 1983's fourth quarter, the first time it had managed a profit since early 1980.

The good news at home had its parallel abroad, where Americans were enjoying the spending power of the strongest dollar in years. Propelled by the high level of U.S. interest rates and concerns about political instability abroad, the dollar smashed records for three straight days. The U.S. currency reached alltime highs against the French franc, the Italian lira and the British pound, and a ten-year peak in relation to the West German mark. By the end of the week, a dollar was worth 8.59 francs, 1,700.25 lire and 2.8 marks. The pound cost only $1.40. The dollar's gains continued even though the U.S. Federal Reserve was selling greenbacks to brake the currency's rise.

Economists generally shared the optimism found in the markets. Said Otto Eckstein, chairman of Massachusetts-based Data Resources: "The economy is in a classic expansion phase. With employment up by such a magnitude and store sales rising, as high as they did, incomes and retail sales will continue to rise in the months ahead." Concurred Alan Greenspan, chairman of the Townsend-Greenspan economic consulting firm: "This news is telling us that the recovery is still solid and still has a long way to go."

Not everyone, however, saw only good times ahead. In a leaked memo, Martin Feldstein, chairman of the Council of Economic Advisers, urged President Reagan to call for a $50 billion tax increase in the budget that he will present to Congress later this month. An outspoken opponent of runaway deficits, Feldstein warned that without new taxes the federal shortfall will be "at least $170 billion in every year between now and 1989." He said later: "The economy is very strong.

Unemployment has shown the biggest twelve-month drop since the Korean War. But we shouldn't let this lull us into believing that we don't have to do something about the deficits."

Feldstein's proposal is certain to be opposed by Administration aides like Treasury Secretary Donald Regan.

Last year Regan sharply clashed with Feldstein, rejecting the CEA chairman's contention that taxes had to be raised substantially to cut the deficit. With all the good news, many Reagan Administration officials would seemingly prefer just to sit back and let the good times roll than worry about deficits. -- By John Greenwald.

Reported by David Beckwith/Washington and Lawrence Mondi/New York

With reporting by David Beckwith/Washington and Lawrence Mondi/New York