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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Oeconomicus who wrote (14533)	10/24/2002 4:11:06 PM
From: stockman_scott	Read Replies (1) \| Respond to of 57684

Fed Vice Chairman Says Productivity Gains Key in Keeping Economy Afloat By Deborah Lagomarsino Dow Jones Newswires Thursday October 24, 3:52 pm ET WASHINGTON -- Federal Reserve Vice Chairman Roger Ferguson expressed optimism about the outlook for corporate profits and capital spending, citing continued productivity growth as a key factor sustaining their recovery. "Although some industries have suffered severe losses and have sharply curtailed their capital expenditures, other sectors have posted growth in earnings and have continued to invest," he said in prepared remarks to the London Business School. "Thus, in the aggregate, the underlying picture of both corporate profits and capital spending is not as bleak as the experiences of some industries might suggest," he added. The latest data show that profits in the second quarter were 8.75% above year- ago levels, and if the underlying pace of productivity growth remains strong, " aggregate profits will continue to recover once the sectoral imbalances are eliminated," said Mr. Ferguson. His upbeat comments about capital spending come just a day after the Fed's latest Beige Book report on the economy showed that firms are growing more reluctant to move ahead with capital-spending plans amid increasing nervousness about the economic recovery and a potential U.S. war with Iraq. Capital spending has fallen for seven-straight quarters, although the pace of cutbacks has slowed. A pick up in capital spending is seen critical to the sustainability of the recovery. Mr. Ferguson cautioned that a period of inadequate business investment that results in "capital shallowing" rather than capital deepening would "almost surely" hurt productivity, but said he didn't attach a high probability to that scenario. He also downplayed the chances that the current low level of business confidence will hurt the economy, saying the current sentiment slump is only temporary. "Some analysts have cited the low level of business confidence today and the possibility that it could inhibit economic growth," said Mr. Ferguson. "But sentiment rises and falls, and this period of pessimism, too, will pass." He noted he remains "cautiously optimistic" that the economy will continue benefiting from strong productivity-led growth, and said he is confident the productivity boom since 1995 was "real." Productivity began surging in the mid-1990s, growing at a 2.5% average annual rate from 1995 to 2002, up from the 1.5% annual pace during the previous 20 years. Rather than sliding, as has been typical in past recessions, productivity has held up, growing at an eye-popping 8.6% pace in the first quarter and 1.5% in the second quarter. Federal Reserve Chairman Alan Greenspan has long championed the "New Era" view of the economy that the sharp improvement in productivity in recent years is more structural, rather than cyclical, in nature. He has often argued the more- permanent productivity improvement has allowed the economy to grow faster without sparking inflation. Mr. Greenspan said Wednesday that Fed policymakers remain puzzled as to why productivity has continued to rise despite the past year's economic slowdown, but said he doesn't expect the "productivity feast" to turn into a "famine" anytime soon. Future productivity growth is likely to follow the pattern seen between 1960 and 1973 of about 3% growth per year, rather than the weaker performance of about 1.5% growth per year seen between 1973 to 1995, said Mr. Ferguson. "More fundamentally, I believe that the trend in productivity growth has ratcheted up, and this development has been the driving force behind the recent extraordinary productivity growth," he added. As for how the high-technology sector boom contributed to productivity gains, Mr. Ferguson said the Fed doesn't "fully understand" the factors behind the high-tech boom and bust, especially in telecommunications. "There apparently was overinvestment in the late 1990s, but we do not yet know the exact magnitude," he noted. "Furthermore, we don't understand how this overinvestment should be factored into our analysis of productivity growth over this period," added Mr. Ferguson. In addition, he expects the high-tech sector will recover and said its economic prospects "still seem positive over the long run." -By Deborah Lagomarsino, Dow Jones Newswires; 202-862-9255; deborah.lagomarsino@dowjones.com biz.yahoo.com