Forget About an Easing

Summarizing Greenspan's comments in easy-to-read lists.
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Green Wednesday

JACKSON HOLE, Wyo. -- What's it going to be then, eh?

Lists clarify the

testimony as much as anything.

How We Got Where We Are

1.

A rapid pace of technological change has made our capital stock more productive and profitable. That has produced capital gains in equity markets that have lowered the cost of investment in new plants and equipment and spurred consumption.

2.

Improved productivity probably explains why the American economy has done so well despite our oft-cited subnormal national saving rate.

3.

While discussions of consumer spending often continue to emphasize current income from labor and capital as the prime sources of funds, during the 1990s capital gains, which reflect the valuation of expected

future incomes

, have taken on a more prominent role in driving our economy.

4.

The net worth of the average household has increased by nearly 50% since the end of 1992, well in excess of the gains of the previous six years. Households have been accumulating resources for retirement or for a rainy day, despite very low measured saving rates.

Potential Trouble

1.

With corporations already relying increasingly on borrowing to finance capital investment, any evidence of a marked slowing in corporate cash flow is likely to induce a relatively prompt review of capital budgets.

2.

The situation in Brazil and its potential for spilling over to reduce demand in other emerging market economies.

3.

All else equal, a flattening of stock prices would likely slow the growth of spending, and a decline in equity values, especially a severe one, could lead to a considerable weakening of consumer demand.

4.

Growth has continued to shrink the pool of workers willing to work but without jobs. While higher productivity has helped to keep labor cost increases in check, it cannot be expected to do so indefinitely in ever-tighter labor markets.

5.

Businesses will feel under considerable pressure to preserve profit margins should labor costs accelerate further, or should the falling prices of commodity inputs, like oil, turn around. But, to date, businesses' evident pricing power has been scant. Either that would change and inflation could begin to mount or, if costs could not be recouped, capital outlays might well be cut back.

6.

The recent behavior of profits also underlines the unusual nature of the rebound in equity prices and the possibility that the recent performance of the equity markets will have difficulty in being sustained. The level of equity prices would appear to envision substantially greater growth of profits than has been experienced of late.

Sooner? Or Later?

1.

The continued increase in our net external debt (referring to the current account deficit) and its growing servicing costs clearly are not sustainable indefinitely.

Upside Risks

1.

Though the pace of economic expansion is widely expected to moderate as 1999 unfolds, signs of an appreciable slowdown as yet remain scant.

Forget about an easing

next month. And if the economic indicators released between now and March 30 look even remotely like the ones that have been released recently, forget about an easing then, too. Barring catastrophe, not until May 18 will an

FOMC

meeting merit attention.

Other Notes

(a)

Greenspan

says the

Fed

eased in response to the potential economic effects of an abrupt stringency in financial markets.

We were not attempting to prop up equity prices, nor did we plan to continue to ease rates until equity prices recovered, as some have erroneously inferred.

(b) G fears -- and warns against -- a drift toward protectionist trade policies.

Not so well understood, in my judgment, is the impact that fear of growing protectionism would have on profit expectations, and hence on the current values of capital assets.

(c) Pity the poor saps who have been lamenting a low personal saving rate and using it to justify their sorry forecasts. In terms so simple even they can understand, G explained why the personal saving rate sucks -- and why we ought to be looking at national saving anyway.

(d) G. Love has been fading market bulls since

Dow 6400

. And, rightly or wrongly - and even as he applauds our flexible and innovative businesses and workforce - he's still doing it now.

P.S. Number of times in prepared testimony and during the question-answer period that G mentioned the word deflation: None.

Side Dish

Please check out these recent must-read

remarks from Michael Prell, the director of the

Fed's

Division of Research and Statistics.

Only 75 days until Opening Day!!

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