In the canyon of granite and glass that is Wall Street, bad news can ricochet like echoes in a gorge. That was never more true than in the days after Black Monday when the Dow Jones Industrial Average plunged 508 points.
At the time, some analysts called the Oct. 19 crash the first day of an economic tailspin. But seven months after panic washed across Wall Street, it seems the echoes were false warnings.Today, the consensus of economists is that a recession is at least another year away. The momentum the economy has achieved, they say, as unlikely to dissipate quickly, since so many more sectors of the economy are on the rise than in decline.
"Like a lot of other economists, I'm astonished that the economy is stronger now than before the crash," said Albert Sommers, chief economist of the Conference Board, a New York business research organization.
From the stock market peak in August 1987 to the valley three months later, investors lost about $1 trillion in wealth, at least on paper.
When people lose wealth, they usually spend less. Economists expected the $1 trillion decline in wealth to translate into a $40 billion to $50 billion drop in consumer spending. Those forecasts assumed a scenario that called for retailers to cut back on orders, manufacturers to curb production and lay off workers. Within a few months, experts speculated, the consequences of the stock market crash would ripple through the economy.
But it didn't happen.
One reason was that the big gains in the stock market had come so quickly before the crash that investors didn't have time to adjust their spending habits up. In the first eight months of 1987, the stock market had conferred a paper gain of $1 trillion on investors.
After the October crash, they had lost every penny of that $1 trillion. But the market made a halting recovery in the next few weeks. By the end of the year, the Dow was 50 points higher than it had been a year before. As a group, investors were no worse off in December than they had been in January.
As one economist put it, after the crash many investors adopted an easy-come, easy-go attitude and kept spending. With the exception of a brief downturn in November, in the blush of widespread speculation about a recession - which may have made some people worry more about their jobs than about their wealth - consumer spending continued to rise.
"It all comes down to two words - consumer confidence," said David Jones, chief economist at Aubrey G. Lanston & Co., a New York brokerage firm.
Within a few days of the crash, Jones went to Iowa on business, and was surprised to learn that news of the stock market wasn't on everyone's lips. The mood was far different there than the one he had left in the echo chamber of gloom on Wall Street.
"That's why we didn't get a major downturn in the economy," Jones said. "Consumer confidence remained intact even after the crash."
Another reason recession didn't follow the crash was that most people could afford to be blase about the stock market because most people don't directly own stock.
"Only about 5 percent of American households own a significant amount of stock," said Gordon Pye, senior vice president and chief economist at Irving Trust Co. "Only the occasional speculator saw his life savings wiped out."
Therefore the nation wasn't really poorer.
"Those who forecast a recession - and we were never in that camp - largely focused on the wealth effect on consumption," said John Paulus, managing director and chief economist of Morgan Stanley, a New York investment banking firm.
"I don't think they correctly calculated just how strong the economy was on Black Monday. The growth in the export market fueled sizable income gains in the country. It's the income gains that really paved the way for a continued vigorous expansion."
Government response to the crash also played an important role.
The Federal Reserve Board reacted to the 1987 crash in a way it had not in the market debacle of 1929. This time, the Fed flooded financial markets with credit, enabling banks to extend credit to hard-pressed brokerage firms. In the process, short- and long-term interest rates declined rapidly. Within a month of the crash, the cost of borrowing had declined nearly 15 percent.
And now, given the effectiveness of the Fed actions, a few economists have reached a topsy-turvy conclusion about Black Monday: The market crack-up may have postponed a recession because of the way the government and the public responded to the jolt.
"Had the market not crashed, undoubtedly we would have been in a recession now," said Irwin Kellner, chief aconomist at Manufacturer's Hanover. He said quick actions by the Federal Reserve Board and surprisingly resilient consqmer spending averted a recession that was brewing last fall.
That may be debatable, but few doubt the fallout from the crash had medicinal effects on the economy.
"The aftermath of the crash had the effect of cooling off things, kind of like a mid-summer thunderstorm," said Kellner.
In the months before the October crash, Kellner noted, interest rates had been rising and fear of inflation threatened to force the Fed to tighten credit yet again. But after the Wall Street panic, the Fed was free to stimulate the economy.
"After the crash, all around the world we got economic stimulus," said Donald Ratajczak, director of the Economic Forecasting Project at Georgia State University. "The Americans, the Japanese, the British and the Germans all stimulated their economies."
That economic prodding also gave Americans the credit and the confidence to keep buying imported goods, even at inflated prices that rose in tandem with the falling international value of the U.S. dollar. At the same time, stimulated foreign economies started to buy more from the United States.
In part, lower interest rates and other government inducements explain how the U.S. trade deficit has narrowed.
In the early 1980s car makers, machine tool companies and firms that made all manner of goods saw their export volume decline dramatically because of the strong dollar. In the last year, the situation has reversed and a surge in exports has created hundreds of thousands of jobs in once-idled factories.