That Depression Talk

The stock market is extremely sensitive to talk--especially when it comes from high places. Last week a rash of talk from Washington about the state of the U.S. economy unnerved an already shaky market and sent it into a spin.

The boom-and-bust warnings of Secretary of the Treasury Humphrey and ex-President Hoover (see NATIONAL AFFAIRS) helped start a selling wave that sent the Dow-Jones industrial average tumbling 7.23 points (to 469.96) for the widest single-day break in eight months. The market rallied Wednesday, until a selling surge was set off by President Eisenhower's warning that the Government might have to impose wage and price controls. By that time not even Secretary of Commerce Weeks's prompt assurance that no controls were planned was enough to stop the downtrend. Next day the market dropped through the 1957 low set two days before. At week's end the market steadied, but the Dow-Jones average ended the day at 466, nearly 11 points off from the previous week. Wall Streeters began watching anxiously for a test of the 460 Dow-Jones level, where the market has met strong buying support three times in the last 13 months.

Too Many Doctors. Though the public diagnosis of the U.S. economy was inconclusive, contradictory and widely twisted by scare headlines, all the gabble gave the impression that something must be badly wrong with the patient. Washington, which seemed to be warning of inflation and recession at the same time, was actually saying that if inflation continued to increase, there would be a bust. But Wall Street's consuming worry last week was not inflation but deflation. The fact that the boom is slackening off in a few spots transformed the optimism of a few weeks before into an exaggerated pessimism. Few analysts pointed out that a leveling off is precisely what the Federal Reserve Board has been trying to accomplish for months with its tight-money policy.

Did the actual condition of the patient justify such pessimism? Despite a few soft spots, e.g., carloadings, machine tools, paperboard, the U.S. economy was still operating at peak rates. After the second-best January in history, February auto production is expected to run nearly 4% ahead of last year.

Earnings Up. The Government reported last week that new construction, while declining seasonally in January, set a record for the month with a $3 billion outlay, or 3% more than January 1956. The chemical industry also announced last week that it will spend $2.5 billion on construction in 1957, more than twice as much as in 1956. The Council of Economic Advisors estimated that corporate profits before taxes, which had been declining for the first three quarters of 1956, rose to an annual rate of $46 billion a year in the last quarter, just under 1955's alltime high (among gains announced last week: National Steel Corp.'s 8.7% rise. Reynolds Tobacco's 16.2%).

At week's end the Labor and Commerce Departments announced the biggest sea sonal decline in employment for January since 1949. although the drop was accentuated by a late labor census in December that caught many Christmas employees, e.g., students, housewives, not normally included in the total. The result: though employment dropped 1,700,000, unemployment rose just under 500,000. Even so, nonfarm employment in mid-January was still the highest for any January on record. Despite all the talk of an impending bust, it looked as if reports of its imminence were greatly exaggerated.

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