Signs of faster economic growth in the United States are provoking very different responses among investors and politicians.
Earlier this year, the White House feared a stagnant economy might damage President Bill Clinton's re-election chances. Republicans sounded all too credible when they referred grimly to a "Clinton crunch' caused by tax increases imposed in 1993.Clinton, it was implied, might suffer the same fate as George Bush, whose 1992 campaign was torpedoed by the perceived weakness of the economy.
But now a jubilant Clinton administration claims credit for: The highest level of consumer confidence in six years and a belated recovery in manufacturing production. Real economic growth in the first quarter at an annual rate of 2.8 percent, about twice as fast as expected. A fall in the unemployment rate to 5.4 percent, matching the lowest level in the past 18 months and close to most economists' definition of "full employment'.
On Wall Street the growth figures created a dour mood and sent the yield on the benchmark 30-year Treasury bond soaring above 7 percent for the first time in nearly a year.
Yields on shorter-dated securities rose even more sharply, reflecting investors' fears that the Federal Reserve would be forced to raise short-term interest rates in the near future if not later this month, then at its policy meeting in July.
The fragility of bonds has not yet caused a meltdown in the stock market. But it has created an uneasy mood: share prices are now moving sideways, having climbed rapidly for more than year. Bonds are taking a hammering because of the violence of the change in financial expectations.
A few months ago, traders were seriously weighing the risks of recession. They had every reason to expect the Fed to cut short-term rates to about 4.5 percent by late summer against 5.25 percent today.
The hasty re-writing of economic scenarios has inevitably fuelled fear of inflation, which was bubbling up anyway because of recent sharp increases in the price of oil, grain and other commodities.
In Washington such worries are seen as greatly overstated.
The White House Council of Economic Advisers argues that the increases in oil and grain prices will be short-lived because they reflect temporary distortions.
Grain prices have soared because of the drought in the Midwest, but the impact on consumer prices will be modest because cattle herds will be slaughtered, reducing meat prices. An unusually long and cold winter, meanwhile, has put short-term pressure on oil stocks, most evident in soaring gasoline prices.
Administration economists also emphasise that the economic rebound, while welcome, is so far comparatively modest. Growth at 2.8 percent should not be seen as threatening after a stagnant fourth quarter. The gross domestic product is only 1.8 percent higher than in the first quarter of last year.
The composition of growth is encouraging: the strongest element was a surge in business equipment investment which grew at an annual rate of 14.5 percent in the first quarter. If investment stays strong, industrial capacity will rise, reducing potential inflationary pressures.
And although the jobless rate fell sharply last month, non-farm payroll employment (which is generally seen as the more important indicator of labour market conditions) rose by only 2,000. This was far below expectations and surprisingly weak following an average monthly gain of 221,000 in the first quarter. Employment fell significantly last month in manufacturing and construction, adding further credence to claims that growth will remain fairly modest.
Wall Street's fear of inflation, however, is unlikely to dissipate quickly, and some acceleration in retail price inflation has already occurred.
But with the jobless rate so low, the single biggest worry is pressure from wages. Two indicators last week flashed warning signals. The wage component of the Employment Cost Index, the Fed's favored measure of labor costs, rose more than expected in the first quarter. And in April average hourly earnings rose an unexpectedly sharp 0.6 percent, taking the annual increase to 3.1 percent.
Since the Fed is now committed to a policy of pre-emptive strikes against inflation, the risk of an increase in short-term rates has undoubtedly risen.
History suggests Fed officials have few inhibitions about tightening in an election year, but they prefer not to appear partisan by acting during the final stages of a campaign.
So if the economic data stay strong and the Fed decides higher rates are prudent, it is likely to move in the next few months.
(Distributed by Scripps Howard News Service.)