SAN FRANCISCO -- The
is a long way from 5000, but the so-called New Economy is alive and well. At least, that was the message delivered by
Friday at his
much-anticipated speech at the Bay Area Council's annual economic summit.
The speech began with a quick review of the economy's state before and after Sept. 11, but soon delved into one of the chairman's favorite subjects: The salutary effect of technology on productivity.
"Alas, technology has not allowed us to see into the future any more clearly than we could previously," he said, conceding the failure of just-in-time inventory management at the onset of the current downturn. "But, technology did facilitate the quick recognition of the weakening in sales and backup of inventories. This enabled producers to respond forcefully, as evidenced by output adjustments that have resulted in the extraordinary rate of inventory liquidation currently under way."
This contributed to the U.S. economy's "extraordinary degree of resilience and flexibility" to the challenges pre- and post-Sept. 11 as "imbalances have not been allowed to fester," Greenspan said.
That has led to a recent "emergence of stability" in the economy, Greenspan said, adding the proviso "if that is what it is."
He also talked about how "the hypothesis of an accelerated productivity trend had not been tested in the contracting phase of a business cycle" until the current recession. But "early returns certainly look favorable to the hypothesis."
These aspects of the speech were not the market's main focus. As reported elsewhere, traders focused on Greenspan's cautious comments about the tenuousness of the recovery, which contributed to stocks sliding and Treasuries rallying.
Dow Jones Industrial Average
fell 0.8% Friday, ending the week down 2.7%. The
shed 1%, ending the week down 2.3%, while the Nasdaq shed 1.2%, bringing its weekly decline to 1.8%. The price of the benchmark 10-year Treasury rose 11/32 to 101 1/32, its yield falling to 4.86%, its lowest level since Dec. 4. For the week, the 10-year yield fell 27 basis points.
Jim Bianco of Bianco Research is a big believer that Greenspan's Fed follows the market, rather than leads it. But heading into today, fed fund futures were pricing in just 25% odds of an ease while the majority of primary bond dealers were expecting it, he noted.
today was to get everyone on the same page," Bianco said. "Now everyone thinks they will ease."
Indeed, fed fund futures were pricing in more than 80% odds of a 25-basis point ease at the Fed's Jan. 29-30 meeting. The Fed "eased today at 1 p.m. EST and the formal announcement of that ease will be Jan. 30," Bianco said.
New Economy, What New Economy?
Back to the issue of Greenspan's tech myopia, which struck me for two reasons. One, many observers believe Greenspan's
repeated paeans to technology-enhanced productivity over the years contributed to the acceptance of New Economy theories that the business cycle had been slain, which in turned caused some investors to assume undue risk.
Second, and less conspiratorially, when I
recently interviewed Anirvan Banerji, director of research for the Manhattan-based Economic Cycle Research Institute, he argued that falling import prices -- not productivity growth -- were key to the so-called Goldilocks economy of the late 1990s.
"I'm hesitant to dismiss the productivity rise as a factor in limiting inflationary pressures, but it is not
factor," Banerji said today. "If it was the issue, why did the Fed start raising interest rates in 1999?"
For those who haven't read the earlier interview (
), Banerji's contention is that Japan's stealth expansion in 1999 resulted in an upturn in U.S. import prices as well as industrial materials. In reaction, the Fed and other world central banks began tightening, which had disastrous consequences for business and investors lured by New Economy theories (see above).
"If productivity was such a decisive factor, the Fed wouldn't have raised interest rates and there wouldn't have been a recession," Banerji said.
Why the chairman continues to insist otherwise remains a mystery.
Quick & Dirty
I also spoke with Banerji about the ECRI's Weekly Leading Index (LEI), which Friday rose to 120.7 for the week ended Jan. 4 -- levels unseen since August -- from an upwardly revised 117.4 the previous week.
"The uptrend that we had seen in the index is intact," Banerji said in the ECRI's
press release . "I think we are getting pretty close to the point where we can say that we are probably looking at an imminent recovery.''
In our discussion, the economist explained he hedged from making a full-blown recovery call in part because two components of the LEI -- mortgage refinancing activity and initial jobless claims -- were skewed higher by one-time changes.
"Both might be exaggerating the strength," he said, while quickly noting the LEI has been rising for 11 weeks now. Also, other leading indicators the ECRI uses, which are immune from distortion, are confirming the economy has turned. "It looks awfully like the LEI's upturn is for real but I want to wait" before signaling the upturn is definitive, he said.
Having said that, the open question is how strong will the recovery be, Banerji continued. His answer: Not very.
The economy faces "a lot of headwinds" including that the outlook for consumer spending -- which has remaind strong throughtout the downturn -- is tenuous, given debt as a percentage of income is at record levels and unemployment is still rising. Additionally, he noted there is still overcapacity in many industries, while corporate "profit pressures because of the global downturn" remain formidable.
He's also dubious about prospects for a robust recovery due the fact inventories have fallen: "The whole inventory bounce-led rebound theory is premised on the rebound in consumer spending," he said. "It's very much circular reasoning
and I've been hearing it for a year."
Have a nice weekend.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.