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Administration's Answer. The week's most poignant summary of the disparity between the shaky stock market and the sturdy economy was voiced by an elderly woman in a Chicago brokerage office who had lost three-quarters of her savings when she panicked and sold out during the plunge. "I don't understand," she said. "There's nothing wrong with our business here. Everything is O.K. in this country. Nothing's changed in two days. Workers are still working. Business is still going. The only thing is, some of us are broke."
If the economy is so healthy, why did the stock market drop so far so fast? The Administration's answer was that the decline in the stock market was not forecasting a recession ahead. Rather, it was belated recognition of the halt in postwar inflation. The U.S. Government's wholesale price index stopped climbing in early 1958. It has held steady ever since, but among buyers of stocks the idea persisted that inflation was still at work. According to Heller and other Administration spokesmen, the awakening came in April when the President forced the steel industry to cancel its announced increase in steel prices. That battle, says Heller, brought home to stock buyers the Administration's unmistakable determination to maintain price stability. "I think part of what's happening in the market," explains Heller, "is that the conviction that inflation is not a way of life in this country is beginning to permeate the economy." Secretary Dillon echoed the theme: "The belief that inflation was just around the corner has been dispelled. That is the basic reason behind the decline in stock prices over the past few months."
Undeserved Repute. In the mythology of Wall Street, the stock market is a clairvoyant forecaster of economic trends. But Heller argues that the correlation between the ups and downs of the stock market and the ups and downs of the economy is far from reliable. Non-Government economists tend to agree that the stock market's reputation as an economic barometer is largely undeserved. "I would never look at the stock market to tell me what the economy is going to do," says J. Howard Craven, chief economist of California's Bank of America.
But what of the possibility that the market decline, by wiping out assets and impairing confidence, might shrink consumer spending and business expansion plans enough to damage the economy? Heller admits that the market drop is "a minus rather than a plus" for the economy. But he thinks that unless it carries deeper, it will not make any severe dent in the economy. He asked outside economists for estimates of how much the downturn so far might clip off the gross national product this year. The highest estimate came to $4 billion, considerably less than 1% of the G.N.P.
But the nerve-rending possibility remains that the stocks will start sliding again after a pause, and fall far enough to drag the economy downward. Heller will be watching the market closely during the weeks ahead, and if it breaks below the turnabout Tuesday low, the Administration may well step in with a quick tax cut, and perhaps spending speedups too.