Greenspan Says Global Troubles Are Likely to Slow U.S. Growth; 'No Oasis'
Greenspan Says Global Troubles Are Likely to Slow U.S. Growth
Berkeley, California, Sept. 4 (Bloomberg) -- Global economic woes can be expected to slow the U.S. economy's rate of growth, Federal Reserve Chairman Alan Greenspan said. ''It's just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress,'' Greenspan said, in the text of remarks at the University of California at Berkeley.
And the potential for that slowdown is lessening the threat that U.S. inflation might accelerate any time soon, Greenspan said. By the time of the Fed's August meeting, policymakers thought that the inflationary risks to the economy had ''become balanced,'' he said.
In his last public remarks on the economy in late July, Greenspan suggested he was more worried about the economy overheating than he was about the risk of a recession. With consumer demand strong and labor markets tight, ''the potential for accelerating inflation is probably greater than the risk of protracted, excessive weakness in the economy,'' Greenspan said in his July 21 Humphrey-Hawkins testimony to Congress.
Since then, however, the threats to the U.S. economy have heightened. Personal spending fell in July and industrial production slowed as exports to recession-plagued Asian nations declined, government reports showed. Russia's economic and political crisis also worsened, triggering warnings of trading losses from several U.S. banks and brokerage firms.
Concern About Profits
All of that has boosted concerns about the sustainability of U.S. corporate profits -- and sent stocks reeling. The Dow Jones Industrial Average and the Standard and Poor's 500 Index, which both peaked a day before Greenspan's congressional testimony in July, have each since fallen 17.8 percent -- even as the yield on the benchmark 30-year Treasury bond has fallen to record lows. It was at 5.29 percent today.
Many of the nation's biggest stocks, including Merck & Co. and Pfizer Inc. fell amid signs that earnings will dwindle as developing economies stumble. Analysts this week cut their estimates for this year's growth in operating profits to 5.3 percent from 5.7 percent, according to First Call Corp.
Many Wall Street economists and investors now expect the Fed's next move to be an interest-rate cut to stimulate U.S. economic growth, though such a move may not come until later this year. Fed policymakers, who meet next on Sept. 29, have left the overnight bank lending rate at 5.50 percent since March 1997 as inflation has been nearly nonexistent.
The consumer price index rose at a 1.5 percent annual rate in the first seven months of the year, putting inflation on track to beat last year's 1.7 percent increase, the smallest gain since 1986.
Rate Cut Possibility
U.S. central bankers have acknowledged investors' expectation that the Fed's next move will be to lower interest rates. ''Given that market interest rates have come down so much, the market is making a judgment that the Fed's going to ease,'' said St. Louis Fed Bank President William Poole, at a Fed conference in Jackson Hole, Wyoming last weekend. Poole didn't suggest he's advocating a rate cut now, though he said he's abandoned his push to get the policy-setting Federal Open Market Committee to raise rates.
One reason Fed officials were considering boosting the overnight bank lending rate earlier in the year is because the drop in U.S. interest rates sparked a housing boom. Over the last four months, the annual rate of new home sales has stayed between 886,000 and 900,000 as mortgage rates held below 7 percent.
While new home sales fell in July, it doesn't point to significant weakness in housing activity, analysts said. And for good reason. Consumers are confident and interest rates are low. The average rate on 30-year fixed-rate mortgage so far this month is 6.92 percent, down from July's 6.95 percent and June's 7 percent.
Jobs Rebound
A rebound in U.S. payrolls last month, led by the return of idled General Motors Corp. workers, disguised a decline in factory jobs that analysts said may herald a slowdown in job growth in the months ahead.
U.S. companies added 365,000 jobs in August, the largest increase in nine months, after adding just 68,000 in July, when the GM strikes were in full force, Labor Department figures showed. The unemployment rate was unchanged at 4.5 percent.
Manufacturing employment would have fallen by 48,000 last month -- for a fifth monthly drop in a row -- if 143,000 autoworkers and others hadn't returned to their jobs in the aftermath of the 54-day GM shutdown. ''It's fair to say that the U.S. is now experiencing a jobs recession in the manufacturing sector,'' said David Orr, an economist at First Union Corp. in Charlotte, North Carolina. ''This is a serious problem.''
The bulk of August's gains came at service-producing companies, where employment rose by 256,000 -- and that number may have been boosted by a one-time event. As the school year started in most of the country, government employment, a subset of the figures on services that includes teachers and school workers, increased by 57,000 in August.
Backing the notion of a slowdown, the National Association of Purchasing Management said this week its manufacturing index hovered in the danger zone last month, posting a smaller-than- expected increase to 49.4 from 49.1 in July. An index below 50 means a majority of manufacturers surveyed said their business deteriorated. For 22 months prior to June the index held above 50 -- signaling growth.
The Fed's official forecast calls for a 1998 economic growth rate of 3 percent to 3.25 percent, slowing to about 2.0 percent in 1999. ''The performance of the U.S. economy continues to be impressive,'' Greenspan said six weeks ago, citing healthy consumer spending and hiring trends.
bloomberg.com |
