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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: J.T. who wrote (3980)	7/27/2000 1:29:22 AM
From: J.T.	Read Replies (1) \| Respond to of 19219

Economic Brief by Dr. Scott Brown Greenspan Testimony (Highlights) Greenspan's monetary policy testimony was mixed, but had an underlying hopeful tone. Growth has slowed, but the Fed can't say for sure whether it will continue at a sustainable pace (a lot may depend on equity values). No grand theorizing, a promise to remain vigilant, but a tone that was more positive than expected. Greenspan talks of the "complex challenges" facing the Fed in coming months and notes previous concerns about the balance between supply and demand: "A key element in this disparity has been the very rapid growth of consumption resulting from the effects on spending of the remarkable rise in household wealth. However, the growth in spending has slowed noticeably this spring from the unusually rapid pace observed late in 1999 and early this year. Some argue that this slowing is a pause following the surge in demand through the warmer-than-normal winter months and hence a re-acceleration can be expected later this year. Certainly, we have seen slowdowns in spending during this near-decade-long expansion that have proven temporary, with aggregate demand growth subsequently rebounding to an unsustainable pace But other analysts point to a number of factors that may be exerting more persistent restraint on spending. One they cite is the flattening in equity prices, on net, this year. They attribute much of the slowing of consumer spending to this diminution of the wealth effect through the spring and early summer. This view looks to equity markets as a key influence on the trend in consumer spending over the rest of this year and next." Greenspan suggests that spending may be persistently restrained due to the "flattening" of equity prices, the rising household debt burden, the rise in oil prices ("the equivalent of a 1% tax on disposable income"), and the build-up in stocks of consumer durables: "Because the softness in outlay growth is so recent, all of the aforementioned hypotheses, of course, must be provisional. It is certainly premature to make a definitive assessment of either the recent trends in household spending or what they mean. But 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." A key question is how much productivity growth will slow as the overall economy slows: "In one sense, the more important question for the longer-term economic outlook is the extent of any productivity slowdown that might accompany a more subdued pace of production and consumer spending, should it persist. The behavior of productivity under such circumstances will be a revealing test of just how much of the rapid growth of productivity in recent years has represented structural change as distinct from cyclical aberrations and, hence, how truly different the developments of the past five years have been. At issue is how much of the current downshift in our overall economic growth rate can be accounted for by reduced growth in output per hour and how much by slowed increases in hours. So far 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 notes previously-mentioned concerns: "I also pointed out in February that there are limits to how far net imports — or the broader measure, our current account deficit — can rise, or our pool of unemployed labor resources can fall. The current account deficit is a proxy for the increase in net claims against U.S. residents held by foreigners, mainly as debt, but increasingly as equities. There has to be a limit as to how much of the world's savings our residents can borrow at close to prevailing interest and exchange rates. Our burgeoning budget surpluses have clearly contributed to a fending off, if only temporarily, of some of the pressures on our balance of payments. Continued fiscal discipline will contribute to maintaining robust expansion of the American economy in the future." Higher oil prices are a concern, mostly through the spill-over effects on inflation expectations (which could drive actual inflation higher): "Energy prices may pose a challenge to containing inflation. Energy price changes represent a onetime shift in a set of important prices, but by themselves generally cannot drive an ongoing inflation process. The key to whether such a process could get under way is inflation expectations. To date, survey evidence suggests that households and investors do not view the current energy price surge as affecting longer-term inflation. But a deterioration in such expectations would pose a risk to the economic outlook." The Fed sees current-year GDP growth at 4.0% to 4.5% (implying a significant slowing through the end of the year, relative to the first half) and next year's growth at 3.35% to 3.75%. The PCE price index is expected to be 2.0% to 2.5% next year. July 20, 2000 Best Regards, J.T.