K & Thread: Greenspan speaks. Asia didn't like it, but quickly decided to ignore. M2
Top Financial News
Fri, 29 Oct 1999, 6:49am EDT
Greenspan Sees Sustainable U.S. Economic Growth,
More Productivity Gains
By Bill Arthur and Vincent Del Giudice
Greenspan Sees Sustainable Growth, Productivity Gains (Update3)
(Updates markets in paragraphs 8 - 10; changes dateline.)
Boca Raton, Florida, Oct. 29 (Bloomberg) -- Federal Reserve
Chairman Alan Greenspan said the U.S. economy is likely to stay
on a sustainable, non-inflationary path and that American
productivity gains are genuine and lasting.
The Fed chairman's comments late yesterday to an audience of
business executives -- hours after the government reported the
economy expanded in the third quarter at the fastest pace this
year without triggering higher inflation -- suggest the central
bank chief isn't itching to raise the overnight bank lending rate
a third time this year.
``The process of containment may already be significantly
advanced,' Greenspan told the Business Council in a dinner
speech. That's because an increase over the last two years in
real, or inflation-adjusted borrowing costs for businesses, home
buyers, and consumers should eventually slow growth and keep the
economy from overheating, he suggested.
The current U.S. prosperity has been produced by ``a major
acceleration in productivity' spurred by technological
developments such as the Internet, Greenspan said.
Businesses get information faster and make quicker decisions
that enable them ``to remove large swaths of inventory safety
stocks and worker redundancies,' he said.
The result is a ``virtuous cycle,' Greenspan said, in which
``a whole new set of profitable investments raises productivity,
which for a time raises profits -- spurring further investment
and consumption. At the same time, faster productivity growth
keeps a lid on costs and prices.'
Productivity Gains
While some argue that the growth in ``productivity is
ephemeral, I find such arguments hard to believe,' Greenspan
said. ``It seems likely that we will continue to experience vast
advances in the application of the newer technologies and their
associated increases in output per work hour.'
U.S. stocks traded in Europe rose today after Greenspan's
remarks, as did European and Asian benchmark stock indexes.
December futures on the Standard & Poor's index of 500 stocks
rose 7.8 points to 1,358. That's about 0.5 percent above ``fair
value,' taking into account dividends, cost of money, and days
until expiration. Dow Jones Industrial Average futures jumped 56
to 10,743, and Nasdaq 100 futures gained 17.5 to 2578.
In Europe, the Dow Jones Stoxx 50 Index rose as much as 41
points, or 1.06 percent, while Japan's Nikkei 225 Index jumped 3
percent to 17,942.08.
U.S. government bonds rose for a third day, pushing yields
to three-week lows. The 30-year Treasury bond rose 11/32 to 98
20/32, and its yield fell 3 basis points to 6.22 percent.
Greenspan said gross domestic product revisions released
yesterday by the Commerce Department translate into productivity
gains of 2.25 percent per year over the past five years. That
compares with about a 1.7 percent average annual increase over
that period, based on previous government calculations. In
addition, productivity growth accelerated to about 2.75 percent
over the past two years, he said.
Watch Consumers
Still, productivity improvements can't guarantee long-term,
sustainable growth, Greenspan said. Consumer demand could speed
up so much it outstrips productivity improvements, he said.
That extra demand can be met only by rising imports or
increasing domestic output produced by an expanding labor pool,
he said.
Greenspan also repeated earlier warnings that a reliance on
imports to satisfy domestic demand -- while helping to hold down
prices -- has caused the trade deficit to balloon, and that could
undermine investor confidence in the U.S. economy.
``Imports presumably can continue to expand for a while,
since the rising rate of return on U.S. assets' has attracted
foreign capital, Greenspan said. ``For the recent past, direct
investment inflows have almost matched the total current account
deficit.
``But a continued widening of the deficit could eventually
raise financing difficulties, ultimately limiting import
growth,' Greenspan said.
Labor-Cost Risk
He also echoed his earlier concerns about worker shortages
and the potential for rising labor costs translating into
accelerating inflation.
``Over the past two years, the pool of people seeking jobs
-- the sum of the officially unemployed plus those not in the
labor force waiting to work -- has declined from 11.2 million to
9.6 million,' Greenspan said.
While that carries inflationary implications, Greenspan also
suggested that higher interest rates are likely to eventually
lead to a slowdown of job growth.
Treasury bonds and U.S. stocks soared in trading before
Greenspan spoke yesterday, sending the Standard & Poor's 500
Index to the biggest gain in a year, after government reports
showed wages and prices rose less than expected in the third
quarter even as growth topped forecasts.
`Best of Both Worlds'
``You have the best of both worlds -- higher-than-expected
growth and lower-than-expected inflation,' said Robert Bloom,
chief investment officer for Friends, Ivory and Sime, which
manages $4.3 billion.
The employment cost index -- measuring wage and benefit
costs -- grew 0.8 percent in the third quarter after rising 1.1
percent in the second, the Labor Department said.
The U.S. gross domestic product rose at a 4.8 percent annual
pace in the third quarter, the Commerce Department said. That's
up from a 1.9 percent growth rate in the second quarter and a 3.7
percent pace in the first.
The third-quarter GDP price deflator, a measure of inflation
followed by investors, grew at a 0.9 percent pace, down from a
1.4 percent rate the previous quarter. The third quarter increase
was at the slowest pace since the first quarter of 1998.
Personal spending rose at 4.3 percent annual rate in the
third quarter, down from an increase of 5.1 percent in the second
quarter and 6.5 percent in the first. Business inventories rose
$28.1 billion in the third quarter, more than double the $14
billion increase in the second quarter.
Revised Higher
The government also released benchmark revisions to GDP
today. The changes -- going back to 1959 -- boosted 1998 GDP to
4.3 percent and 1997's growth rate to 4.5 percent, both
previously 3.9 percent.
U.S. economic growth has increased at an average annual rate
of 3.5 percent compared with the previously reported rise of 3.1
percent, the benchmark revisions showed.
The revisions also showed the economy grew at a 4.3 percent
rate in 1998 and 4.5 percent in 1997, both faster than the 3.9
percent previously reported.
Those gains are also restraining inflation. From 1990 to
1998, the implicit price deflator rose an average of 2.3 percent
a year, less than the 2.6 percent average previously estimated by
the Commerce Department. Last year the deflator rose 1.2 percent,
the slowest since 1963.
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