Recession reaction

How will Washington react to the recession? Wall Street began to ask this question last week as politicans and investors started to get a clearer picture of the economic downturn.

Even the continued decline in interest rates failed to alleviate some concerns that the remedies proposed by a President running for re-election might be more painful later than the current recession.

Thus, the Dow Jones industrail average appeared to stall last week even though it ended the week with a gain of 10.67, closing at 861.52. Volume was active.

Wall Street and Washington got their first real glimpse of the recession's toll when the government reported that unemployment rose in May to 7.8 percent of the work force, up from only 6.2 percent two months ago. Monte Gordon, director of research for the Dreyfus Corporation, a billion-dollar mutual fund, noting the rise, asked, "What kind of pressure will Congress and the President feel to slow down the recession trend?"

Mr. Gordon replies that he doubts Congress or President Carter can undertake massive stimulative measures in the next three to six months to halt the slide. Instead, he expects the Federal Reserve Board to continue to dismantle the credit controls it imposed in March.

Lee Idleman, senior vice-president of Dean Witter Reynolds Inc., notes that although President Carter has said he will not propose a tax cut in 1980, he did not rule out the possibility of a tax cut which will take effect in 1981. He adds: "Coming on to of revenue shortfalls in a recession, any meaningful tax cut would swell the federal deficit. Layering increased defense spending on top of the conjures up the possibilities of a $70 billion to $100 billion budget deficit in fiscal 1981."

Such a large budget deficit, concludes Mr. Idleman, "threatens to reverse the trend to lower interest rates, as well." This would be bad for the stock market. Mr. Idleman says investors should be cautious now that the market is on a higher plateau.

Although the stock market slogged along last week, gold bullion was active as buyers moved back into the precious metal. By the close of trading on Friday, gold in New York reached $603 per ounce, the first time in months gold had gone back over the $600 lvel. For the week, gold was up nearly $70 per troy ounce for the week.

There were several reasons for the sharp run-up in bullion. First, a terrorist attack on a synthetic oil project in South Africa underscored to some investors the vulnerability of gold supplies from that country. Secondly, rumors about Iran and the hostages began to surface again. Finally, notes Mr. Gordon, there is the feeling that the Federal Reserve board may have eased too early, prompting another inflation binge in spite of the report by the government that the producers price index only rose by 0.3 percent last month.

On the interest rate front last week, the prime rate dropped from 14 percent to 13 percent, surprising some Wall Street analysts who had not expected the sharp drop. However, as John Torrell, vice-chairman of Manufacturers Hanover Trust Company, noted last week, loan demand has been much weaker than the banks would like. In fact, loan demand is off so much, one corporate assistant treasurer reports that his company was being offered money at 1 to 1/2 percent below the 14 percent prime.

In the market last week, merger stocks were active.

Dart Industries gained after it said that it planned a $2.5 billion tax free merger with Kraft Inc. The combined sales of the new company would be $9 billion

In another major merger last week, Getty Oil outbid Connecticut General for ERC Corporation, a reinsurance company. Getty's winning offer was $97 per share , up from Connecticut's $80 per share bid, and worth $570 million.

Standard Oil of Indiana was also active last week after Amoco, a subsidiary, announced a major natural gas find in the southwest corner of Wyoming.