Greenspan speaks today. Looks like we will have another up day tomorrow in reaction to this. Jeff
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U.S. Economy
Mon, 08 Mar 1999, 5:01pm EST
U.S. Economy: Greenspan Lauds Economy's 'Spectacular' Results
U.S. Economy: Greenspan Lauds Economy's 'Spectacular' Results
Washington, March 8 (Bloomberg) -- The U.S. economy ''has
turned in a spectacular performance in recent years,'' with
inflation staying low even as the nation's unemployment rate
fell, Federal Reserve Board Chairman Alan Greenspan said.
Real gross domestic product has increased around 4 percent
in each of the last three years, about 8 million jobs have been
created since 1995, and the unemployment rate has fallen below
4.5 percent to its lowest readings in three decades, he said in a
speech to the Mortgage Bankers Association. Even so, ''inflation
has been well-behaved,'' Greenspan said.
There's also little reason to expect a big acceleration in
consumer prices anytime soon, analysts said. That suggests the
Fed doesn't have the smoking gun it needs to justify increasing
the overnight bank loan rate, now at 4.75 percent, they said.
Commodity prices remain near a 25-year low, gold is near a
six-month low, and on Friday the Labor Department reported
workers' hourly wages rose just 1 cent in February and 3.6
percent over the past year, the slowest rate of increase in 19
months.
Tomorrow, the Labor Department is expected to report that
worker productivity during the fourth quarter of 1998 increased
more than first thought, making it possible for companies to
produce more at less cost.
''The evidence of inflation is non-existent,'' said Brian
Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson
Inc. in Chicago. ''Wall Street's fears of the Fed are
overblown,'' he said.
Poole Comments
The benchmark 30-year Treasury bond was little changed to
yield 5.59 percent in trading today. Stocks were mixed. The Dow
Jones Industrial Average fell 8.47 points, or 0.09 percent, to
close at 9727.61, and the Nasdaq Composite index rose 60.5
points, or 2.59 percent, to close at 2397.62.
Earlier today, St. Louis Fed Bank President William Poole
offered a different assessment, saying that investors who pushed
bond yields to their highest in six months are correct in
assuming the Fed's next move is most likely to increase interest
rates.
''The market has formed a judgment that the next move is one
of tightening,'' Poole said in an interview. ''The market's
judgment is probably right.''
Poole, who is not a voting member of the Fed's policy-making
Open Market Committee this year, has been a hawk on inflation. As
an FOMC member last year he dissented on May 19, voting for an
immediate rate increase while the rest of the 12-member committee
voted to leave rates unchanged.
Oil Prices Rising
Poole acknowledged few signs of inflation are evident.
Still, he said, the Fed must be preemptive, acting before
accelerating prices are reflected in the consumer price index.
After falling to levels not seen since the 1950s, inflation
is expected to pick up a bit this year. Oil prices, which fell 35
percent last year, have been rising since the middle of February.
That in itself should push producer and consumer prices higher.
''I think you've seen the lows for energy prices,'' said
Alan Struth, chief economist at Phillips Petroleum Co. in
Bartlesville, Oklahoma. Still, he said, it's ''not real clear
whether the oil price increase is sustainable at this point.
There's still some pretty strong deflationary pressures in the
global economy.''
That's showing in commodity prices. The Commodity Research
Bureau index hit a 24-year low of 182.93 on Feb. 26. It's up only
marginally since then, to 186.64 today. Lower prices for building
materials are one reason why new home prices have been contained.
Housing Boost
Greenspan didn't offer any outlook on how the economy will
perform in the months ahead, or how Fed policymakers will
respond. Instead, he focused his remarks on how declining
interest rates have affected the housing market. ''The positive
effects of the decline in mortgage rates and the rise in
household income have more than offset the negative effects of
rising house prices,'' Greenspan said.
The housing market should continue to be strong, he
suggested. ''Demographic underpinnings for housing demand have
held up surprisingly well,'' he said. In part that's because of a
''continued large influx of immigrants'' and ''delayed household
formations by the trailing edge of the baby boom.''
Also helping are the replacement of homes destroyed in
natural disasters and a ''marked uptrend'' in demand for second
homes.
All of that has helped fuel the U.S. expansion, now the
longest in peacetime history. ''We estimate, based on a median
period of owning a home nine years, that each home sale since
1995 has averaged roughly $35,000 in capital gains, implying a
total of $150 billion annually for the economy as a whole,''
Greenspan said.
Outlook Unclear
Added to that are unknown billions from refinancings,
Greenspan said. ''One might expect that a significant portion of
the unencumbered cash received by sellers and refinancers was
used to purchase goods and services,'' the Fed chairman said.
That may be true of people who don't sell or refinance as
well. ''A middle-aged person who is sitting on a substantial
unrealized gain in his or her house, but does not plan to sell
for 10 years, may still boost consumption today in anticipation
of that gain,'' he said.
Mortgage refinancing has fallen off, Greenspan said, ''even
though many loans would still appear to be ripe for
refinancing,'' especially those with rates above 8 percent, he
said. ''Given last year's prolonged period of low mortgage rates,
one wonders whether many of those who have not yet refinanced
will do so, eve if mortgage rates remain at their current
levels,'' Greenspan said.
The Fed, as always, wants to be preemptive, heading off
inflation before it takes root. Yet with little reason to expect
rising prices ahead, the central bank is sidelined for now,
analysts said. ''The Fed is very unlikely against this backdrop
to do anything at their next meeting'' on March 30, said Nick
Perna, chief economist at Fleet Financial in Hartford,
Connecticut.
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