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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: Softechie who wrote (33161)	2/25/2002 3:01:33 PM
From: Softechie	Read Replies (1) \| Respond to of 99280

MONUMENT DERIVATIVES:Greenspan Seen Upbeat On Medium Term 25 Feb 08:05 By Stephen Lewis Of Monument Derivatives LONDON (Dow Jones)--Mr Greenspan is due to deliver his half-yearly testimony on the economy and monetary policy before the House Financial Services Committee on 27 February. He is expected to sound a fairly optimistic note on medium-term prospects but to avoid giving an impression that the Federal Reserve is about to swing back into credit tightening mode. Much has happened since the Fed Chairman's last round of testimony seven months ago; these events are likely to be cited as evidence of the US economy's resilience to shocks. Last July, the 'central tendencies' of the Federal Reserve Governors' and regional Fed presidents' projections for the US economy were looking for it to slow but not by as much as, in fact, it did. Their expectation was that nominal GDP would grow by 3.50-4.25% from 2000Q4 to 2001Q4, with real GDP expanding by 1.25-2.00% over the same period. In the event, nominal GDP grew by only 2.0% while, after adjustment for inflation, GDP hardly increased at all, rising by 0.1%. This very serious shortfall, in part, reflected the impact of the events of 11 September. Consequently, whereas the 'central tendency' had called for an average 2001Q4 jobless rate of 4.75-5.00%, unemployment actually rose to 5.6% of the workforce. As for inflation, the 'central tendency' for growth in the consumers' expenditure (PCE) deflator in the four quarters to 2001Q4 had been pitched at 2.00-2.50% but this measure, in fact, rose by 1.3%, benefiting from sharper then expected declines in energy costs. The Federal Reserve policymakers also presented, in July, provisional projections for the major economic variables for the year to 2002Q4. So far were the 2001 projections from the eventual outcomes that these 2002 expectations are unlikely to have formed the basis for the Federal Reserve's latest deliberations on the economic outlook. For the record, the 'central tendencies' were as follows. For nominal GDP, Fed policymakers looked for growth of 5.00-5.50% in the year to 2002Q4, with real GDP recording growth of 3.00-3.25%. They saw PCE inflation of 1.75-2.50%. They believed these forecasts to be consistent with unemployment in a 4.75-5.25% range. This last figure shows how wide of the mark the projections are likely to be; most outside forecasts of unemployment are around one percentage point higher than the Fed's 'central tendency'. Short-term interest rates are 200 bps lower now than they were when Mr Greenspan delivered his testimony last July. The timing of the rate cuts in the intervening period indicates that they will have had hardly any effect in supporting economic demand in 2001Q4. Their impact will come through mostly in 2002. There is more monetary stimulus in the economy than appeared likely then. On the fiscal side, however, there were once-off measures designed to help industries hurt by the fall-out from 11 September but the Administration's proposals for general fiscal reflation have run into the sand. Fed policymakers might be entitled to project a stronger pick-up in economic activity between 2001Q4 and 2002Q4 than they envisaged last summer but, perhaps, not so strong as to offset in full the impact of the sharper than expected slowdown in business activity on the level of GDP in 2002Q4. After all, the suspicion persists that even discounting the impact of the terrorist attacks US economic growth would still not have met the Fed's 'central tendency' for 2001Q4. To do so, it would have needed to achieve annualised growth of at least 1.6% in the second half of 2001, after the economy had entered that period with negative momentum. Fed policymakers seem to have under-estimated the malaise in the high-tech sector, a condition that has persisted into the current half-year. Their enduring belief in a 'productivity miracle' could well lead them to over-estimate growth and under-estimate inflation in the projections they will present this week. After all, the shortfall from the projected PCE deflator in 2001Q4 was modest when compared with the large undershoot that occurred in real GDP growth. Furthermore, much of the weakness in the deflator was attributable to the slide in energy prices, which probably turned out steeper than Fed policymakers had expected. Underlying inflation seems to be running more strongly than Fed officials assumed, perhaps a sign that productivity gains are not as sustainable as Mr Greenspan and his colleagues have supposed. They are unlikely to own up to this in their latest projections, however, because the testimony will depend on the productivity story to convince Congress and the markets that all will be well with the economy. -By Stephen Lewis: 44 20 7338 0179: analysismonumentderivatives.com (Stephen Lewis is chief economist at Monument Derivatives, London, independent brokers specializing in institutional business.) Opinions expressed are those of the author, and not of Dow Jones Newswires. This column is published for information only, and it neither constitutes, nor is to be construed as, an offer to buy or sell investments. The information and opinions expressed herein are based on sources the author believes to be reliable, but he cannot represent that they are accurate or complete. Any information herein is given in good faith, but is subject to change without notice. No liability is accepted whatsoever by Monument Derivatives Ltd, employees and associated companies for any direct or consequential loss arising from this article. Monument Derivatives Ltd is regulated by the SFA and is a member of the London Stock Exchange, LIFFE and ISMA. (END) DOW JONES NEWS 02-25-02 08:05 AM