Greenspan Says Economy Slowing, Closer to Balance
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Top Financial News
Thu, 20 Jul 2000, 10:58am EDT
Greenspan Says Economy Slowing, Closer to Balance (Update1)
By Noam Neusner and Michael McKee
Washington, July 20 (Bloomberg) -- The U.S. economy is showing signs of slowing, and if that continues it would lower the risk of accelerating inflation, Federal Reserve Chairman Alan Greenspan said.
``Demand may be moving closer into line with the rate of advance in the economy's potential, given our continued impressive productivity growth,'' Greenspan said in the text of testimony to the Senate Banking Committee on the outlook for the U.S. economy.
``Should this favorable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate,'' he said. That suggests that unless conditions change, Fed policy-makers can hold interest rates at their current levels at their next meeting in August.
At the same time, the Fed chairman warned that higher energy prices are pushing up inflation and it's too soon to know whether the slowdown in consumer spending will last. ``Certainly, we have seen slowdowns in spending during this near-decade-long expansion that have proven temporary,'' he said.
Stocks and Treasury securities gained following Greenspan's remarks. The Dow Jones Industrial Average rose 125 points, or 1.2 percent, and the Nasdaq Composite Index rose 111 points, or 2.7 percent. The Treasury's 10-year note rose 1/2 point, pushing down its yield 7 basis points to 6.08 percent.
The Greenspan-led Fed has raised the overnight bank lending rate six times since June 1999 in an effort to cool the economy by pushing up borrowing costs for consumers and businesses. In June, policy-makers left the overnight rate at a nine-year high of 6.5 percent, saying there were tentative signs the economy was slowing, though the threat of accelerating inflation remained.
Greenspan said recent evidence show that trend continues. Economic indicators suggest growth in household spending ``has slowed noticeably,'' he said.
Wealth Effect
Stocks have tempered their gains this year after five years of double-digit increases. The Dow Jones Industrial Average has lost 7 percent this year, after recording a 25 percent gain in 1999. The Nasdaq Composite Index is unchanged in 2000 after an 86 percent increase a year ago.
That could dampen the so-called wealth effect Greenspan warned about earlier this year, he said. A rising level of household debt and the past year's rise in the price of oil may also be restraining spending, he said.
Also, stocks of homes and household durable goods, such as appliances and cars, have risen at a 6 percent annual rate over the past three years, a marked increase over their previous pace, Greenspan said. ``History tells us'' that can't last, he said.
``Even without the rise in interest rates, an eventual leveling out or some tapering off of purchases of durable goods and construction of single-family housing would be expected,'' he said.
The notion that consumers may have hit a limit in their spending is a ``credible addition'' to other explanations for the recent drop-off in consumer purchases.
Down `Several Notches'
``It is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches, albeit from very high levels,'' said Greenspan.
Greenspan's remarks were the second of the Fed's twice-yearly reports to Congress on monetary policy and the economy. Next week, Greenspan will reprise his testimony to the House Banking Committee.
Along with a slowdown in spending, the U.S. is experiencing a rise in worker productivity that is helping keep prices from rising. Businesses continue to spend on labor-saving investments, and new orders for such equipment continues to be ``quite strong,'' he said.
``There is little evidence to undermine the notion that most of the productivity increase of recent years has been structural and that structural productivity may still be accelerating,'' Greenspan said.
Still, he said, a drop-off in demand could lead businesses to cut back on spending on productivity-enhancing tools, providing a ``revealing test'' on whether productivity gains of recent years have been permanent or temporary.
The answer to that question is at the core of monetary policy right now, Greenspan said, because productivity gains are crucial in helping keep inflation at bay.
Budget Surplus
A rising federal budget surplus has helped restrain inflation as well, fostering the boom in capital spending that has stoked productivity gains, he said.
``Continued fiscal discipline will contribute to maintaining robust expansion of the American economy in the future,'' he said.
The risks of accelerating prices that the Fed's policy-making Open Market Committee saw in June remain, he suggested. He cited the impact of higher oil and gas prices, which have amounted to an annual $75 billion tax on consumers, or 1 percent of their disposable income. At the same time, factors other than energy prices pose an inflationary threat to the economy, he said.
``Inflation has picked up -- even the core measures that do not include energy prices directly,'' he said.
So far, consumers haven't adjusted their expectations about future price increases because of higher energy costs, he said. ``But any deterioration in such expectations would pose a risk to the economic outlook,'' he said.
Domestic demand, ``influenced importantly by the wealth effect'' has grown 1.5 to 2 percentage points faster than the economy's non-inflationary potential, Greenspan said. The gap has been filled by ``a marked rise'' in imports, foreign investment and by drawing previously unemployed workers into the labor force.
Productivity Gains
``There is a limit to the continuing drain on our unused labor resources,'' Greenspan said. To this point, productivity gains have helped keep companies from raising prices to meet higher wage demands, he said.
If the unemployment rate continues to fall, however, ``labor costs eventually will have to accelerate, threatening price stability and our continued economic expansion,'' he said.
There is also a limit to how much foreigners will be willing to invest in U.S. assets and debt, he said. Still, ``so long as our rates of return appear to be unusually high, if not rising, balance of payments trends are less likely to pose a threat to our prosperity.''
The Fed's latest economic forecast calls for the economy to grow 4 percent to 4.5 percent this year. The Fed also expects that the rate of inflation for personal consumption expenditures -- an inflation measure favored by Greenspan -- will rise between 2.5 to 2.75 percent, ``mainly reflecting higher prices of energy products that had been foreseen,'' he said.
The unemployment rate will stay close to its current level of 4 percent, he said.
In 2001, growth is expected to ``moderate'' to 3.25 to 3.75 percent, with unemployment likely to remain ``close to its recent very low levels,'' he said. Inflation will rise around 2 to 2.5 percent, he said.
Fed policy-makers decided in June not to set targets for growth in various measures of the money supply, the Fed's official report to Congress said. The requirement in the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978 that the Fed set those targets has expired, the report said. Measures of the money supply ``for many years have not provided useful benchmarks for the conduct of monetary policy,'' the report said.
Best Regards, J.T. |
