Just how slow should US economy go?

So far, Wall Street is counting on a "soft landing" for the American economy - a slowdown in growth.

Every time there is a sign that the pace of business activity is moderating, investors cheer.

When the jobless rate for May rose slightly to 4.1 percent, the slumping stock market leaped like a jack rabbit and many heaped praise on Fed Chairman Alan Greenspan for engineering a soft landing. "A lot of people ... were saying, 'God Greenspan has done it again,' " jokes J. Paul Horne, an economist in London for Salomon Smith Barney, an investment firm.

Before the recent market rally, some economists predicted Federal Reserve policymakers would raise short-term interest rates at their next meeting on June 27 and 28. It would be the seventh hike since last June.

Then signs of slowing piled up. New orders for manufacturing dropped 4.3 percent in April. The National Association of Purchasing Management's index of manufacturing activity fell unexpectedly in May. Also down were new-home sales, construction spending, and an index of leading indicators devised to predict future economic activity.

"Growth is slowing like a car in a school zone," said National Association of Manufacturers economist Gordon Richards. The NAM continues to worry that the Fed might overdo its monetary policy, braking the economy too much.

But the slowdown news now has some Fed-watching economists changing their views.

The Fed is "on hold," said Bruce Steinberg, chief economist in New York for Merrill Lynch, a major brokerage house. He had forecast another half percent jump in interest rates in June.

"All it took was one relatively sluggish month ... and the momentum crowd [in the stock market] swung quickly from despair to glee," commented Stephen Roach, chief economist in New York for Morgan Stanley, an investment banking firm.

Stock prices snapped back. The market value by last Thursday of virtually all stocks traded in the US reached $16.35 trillion, down $940 million from the March 24 peak, but up substantially from an earlier low, calculates Salomon Smith Barney.

Value of stocks worldwide reached $32.94 trillion, off "only" $2.7 trillion from their peak.

The "gorilla" stock market threatens to undo the Fed's monetary-tightening policy, notes Mr. Horne. Most investors may yet feel so flush as to prop up consumer spending and the US economy.

And the recent indications of a slowdown appear hardly enough to satisfy the Fed. By last week, Fed officials were warning of another interest-rate hike.

Robert McTeer, president of the Federal Reserve Bank of Dallas, and Jack Guynn, president of the Fed's Atlanta branch, emphasized in separate appearances that one month of data doesn't necessarily constitute a trend.

"We still have to wait and see ...," said Mr. Guynn, a voting member of the Fed's policymaking body.

Then a Fed governor, Laurence Meyers, told economists in Boston that "overall inflation has clearly increased significantly over the last year," and spelled out in some detail evidence that this trend will continue.

The unemployment rate is already too low to support a low inflation rate, Mr. Meyers reckons.

Somewhat ominously, he asked whether a slowing-of-the-economy trend alone will bring demand into balance with supply, or whether a period of below-trend growth will be needed.

Meyers did express optimism, however, that the economy would experience a soft rather than a hard landing. The Fed got a head start on containing inflation by starting to tighten last June, he argued.

Economist John Makin isn't so sure. "The enduring market belief in a soft landing makes a hard landing more likely since interest rates don't rise enough and stock prices don't fall enough to slow demand growth," the American Enterprise Institute scholar maintains.

Contrariwise, Michael Cosgrove, an economist at the University of Dallas, figures the Fed has tightened enough. Further, the government's fiscal policy - its tax and spending actions - are already tight. Washington has a huge budget surplus.

The Fed, Mr. Cosgrove warns, "needs to tread carefully from here on" with any rate increases and policy statements. The last rate hike May 16 has already put "a speed bump" on the economic road ahead. More such action might result in "a roadblock that causes wheels off and a crash."

Further tightening might "freeze up" financial markets, he says. Corporate-bond buyers would disappear as they did in the fall of 1998, seeking safety in US Treasury bonds.

Foreigners have $2.7 trillion invested in US credit markets. If they decide to allocate more investments to a reviving Europe, some of that money could leave, dragging down the dollar.

At the moment, though, Cosgrove sees growth in the economy slowing to 2.5 to 3 percent after inflation in 2001, down from 4.5 percent this year.

No recession. No hard landing.

(c) Copyright 2000. The Christian Science Publishing Society