Your flexible friend
Jul 23rd 2004
From The Economist Global Agenda
The hard times are behind us, says Alan Greenspan, though a soft patch is upon us. Interest rates will rise, but the American economy is flexible enough to withstand any troubles on the horizon
WHEN Alan Greenspan, the long-serving chairman of the Federal Reserve, needs help nodding off at night, he sometimes reads his own speeches. This confession, made on Tuesday July 20th during his twice-yearly Humphrey-Hawkins testimony to the Senate, brought a ripple of laughter from the assembled lawmakers, and a murmur of recognition from Fed-watchers everywhere. In the past few months, Mr Greenspan has succeeded in making monetary policy soporific. He has said nothing that he hasn’t been keen to repeat several times. He has done nothing that he hasn’t been careful to talk about well in advance.
This week’s testimony, delivered first to a Senate committee and the next day to a committee from the House of Representatives, will make for prime bedside reading. With the recovery proceeding apace, a tighter monetary policy was both safe and necessary, Mr Greenspan said. Rates will most likely rise at a “measured” pace, but if he has to raise them faster to contain inflation, he will.
The Federal Reserve gives information on monetary policy. The US Bureau of Labour Statistics and the Department of Commerce give up-to-date economic statistics. The US Treasury Department provides news and information on the financial markets, including securities, Treasuries yields and public debt.
A month ago, many feared that prices were on an upward curve, a curve Mr Greenspan had fallen carelessly behind. But weaker retail sales, a slower rate of job creation and a slight ebbing of core inflation in June (up just 0.1%) has vindicated his measured approach and muted his more hawkish critics. “Mr Greenspan can afford to be a little smug,” observed Paul Ashworth of Capital Economics. The Fed chairman resisted that temptation, choosing instead to downplay the significance of a jejune June. These soft patches afflict all recoveries, he said, but they normally prove short-lived.
Inflation had picked up since his last testimony, he conceded, partly due to a “transitory” surge in energy prices, partly due to sustained strength in the economy. Mr Greenspan’s favourite measure of inflation (the price index for core personal consumption expenditures) stood at 1.6% in May, compared with just 0.8% in December. Core inflation eased in June, but Mr Greenspan does not discount the possibility that more “deep-seated” inflationary pressures are building, as yet unseen in the data.
Labour costs are on the rise, he said. In the first half of the year, hourly pay grew at an annual pace of about 4.5%. Employers are also shelling out more for health insurance and pension contributions.
But the pay of nonsupervisory workers—those who make things or provide services, rather than managing others who do—is “subdued”, according to Mr Greenspan. Several congressmen were disturbed by a recent article in the New York Times, reporting that the pay of production workers was lagging behind inflation. Last month, their hourly wages fell by 1.1%, once higher prices were taken into account.
According to Stephen Roach of Morgan Stanley, the American economy is generating “more jobs”, but “worse work”. A quarter of the 1m or so new hires since March took jobs in restaurants, temping agencies and building services, he points out. Another 19% found work in clothing stores, laundry services, grocery stores, the courier trade, hospitals, trucking, social work and “business support”. These industries tend to pay less than the national average. In Mr Roach’s view, this puts the recovery on an uncertain footing. As the monetary and fiscal stimulus of the past three years is withdrawn from the economy, it will have to rely on the spending power of waiters, temps and brickies to keep it going.
In his testimony on Tuesday, Mr Greenspan dismissed these fears. Yes, employer surveys did offer some “slight indication” that the bulk of new hires were in lower-wage industries. But this did not mean they were taking lower-wage jobs. If you look instead at surveys of households, he argued, it is the higher-end occupations that seem to be expanding the most. The two surveys are not necessarily inconsistent, he pointed out. Even low-wage industries have some well-paid jobs: maitre d’s, architects and so on.
But Mr Roach is not reassured. The rosy household survey uses a much smaller sample than the more reliable survey of employers. Indeed, Mr Greenspan has himself warned in the past against leaning on it too heavily.
Two nations
There are, we have been reminded, two Americas. And if doubt reigns about the state of the workers, there is little doubt that the capitalists are doing just fine. Fully 12% of the value of corporate output is now being taken as profit, up from just 7% in the autumn of 2001. Price rises are passing straight into the corporate bottom line. In the year to the first quarter, prices rose by 1.1%, all of which can be attributed to a rise in profit margins.
Buoyed by such strong flows of cash, corporate America is once again prepared to invest. But it is still reluctant to borrow to do so. Companies remain careful to live within their means, their outlays on new equipment and replenished inventories never exceeding their cash flow. Mr Greenspan is surprised by the durability of this diffidence. “The protracted nature of this shortfall is unprecedented over the past three decades,” he pointed out. We are still, he thinks, living with the legacy of past corporate excesses and the fear of present terrorist dangers.
Mr Greenspan wants to return monetary policy to a more neutral stance. But no one knows quite where neutrality lies. When one senator asked for a number, the Fed chairman remained coy. We know when we are above the neutral rate, he observed, and we know that now we are below it. But we won’t know we have arrived at the neutral rate until we get there.
If monetary tightening proceeds at the “measured pace” Mr Greenspan deems likely, he expects businesses and households to cope admirably. Financial strain will be confined to “individual instances”. Capital losses, particularly on bonds, will fall primarily on financial institutions that are well capitalised and well prepared. Once again, the Fed chairman expressed his confidence in the famed “flexibility” of America’s economy. Mr Greenspan's speeches may be soporific, but the dreams they induce are cosy and sweet.
economist.com |
