Fed's Greenspan Sees Slower U.S. Growth, Suggests Rate Cut Is Possible
Sat, 5 Sep 1998, 2:18am EDT
Berkeley, California, Sept. 4 (Bloomberg) -- U.S. economic growth is likely to be slowed by global market woes, setting the stage for a possible cut in interest rates by the Federal Reserve, Fed Chairman Alan Greenspan suggested in a speech. ''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 told an audience at the University of California at Berkeley.
Greenspan raised the possibility that U.S. prices could fall in the months ahead, which he suggested could send U.S. stocks even lower. ''The onset of deflation, should it occur, would increase uncertainty as much as a resurgence of inflation concerns,'' making bonds and other fixed-income investment less risky than stocks, Greenspan said.
The Fed chairman suggested the Fed may be considering cutting the overnight bank lending rate, which it has held steady at 5.50 percent for more than 17 months. By the time of the Fed's August meeting, policymakers concluded the risks of too-fast or too-slow growth had ''become balanced,'' he said. ''The committee will need to consider carefully the potential ramifications of ongoing developments since that meeting,'' Greenspan said.
Poised to Act?
That could be a signal the Fed is poised to lower borrowing costs to keep the economy from stalling, some analysts said. ''Greenspan has put the world on notice that the next move is an ease,'' said Scott Grannis, who helps manage $47 billion in bonds at Western Asset Management in Pasadena, California. ''He's saying it's almost certain the economy's going to slow down substantially, and the Fed needs to get out in front of that.''
That could mean a rate cut soon, according to Grannis. ''I expect the Fed to adopt an easing bias at the next meeting, if not an actual ease,'' Grannis said. ''Conditions here and abroad certainly warrant an ease.'' The Fed's policy-setting Open Market Committee next meets Sept. 29.
Other analysts disagree on the timing of a possible Fed action. ''The Fed's choice is no change or an easing,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. ''But there's no sense of urgency.''
Greenspan once again suggested stock prices may be too high. ''Security analysts' recent projected per share earnings growth of more than 13 percent annually over the next three to five years is unlikely to materialize,'' he said.
He also suggested the shock of recent stock declines could prompt wealthy Americans, many of whom he said aren't saving enough, to cut back their spending.
Euphoria or Distress ''We have relearned in recent weeks that just as a bull stock market feels unending and secure as an economy and stock market move forward, so it can feel when markets contract that recovery is inconceivable,'' he said. ''Both, of course, are wrong. But because of the difficulty imagining a turnabout when such emotions take hold, periods of euphoria or distress tend to feed on themselves.''
Greenspan's comments represent a turnabout in his outlook since he suggested six weeks ago 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.
Greenspan has stressed in the past that the Fed's main mission is to guide the U.S. economy to a path of stable inflation, which means his acknowledgment of the risks from economies overseas is significant, analysts said.
Fed's Mission ''This is one of the first times I've seen a Fed chairman go this far,'' said Anthony Chan, chief economist at Banc One Investment Advisors Corp. in Columbus, Ohio. ''In the past, Fed chairmen have gone out of their way to say no matter how big the global crisis is, we can ignore it until it hits our doorstep because we have to give top priority to our economy.''
Since July, 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.
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 index of 500 stocks, 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.
Slower Job Growth
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.''
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.
Source of Asia's Woes
In his most detailed assessment of what triggered recessions in the so-called Tiger economies of Asia in Indonesia, Malaysia and Thailand, Greenspan in his California speech pointed to ruthless competition in the world of high technology. ''The emergence of excess worldwide capacity in semiconductors, a valued export for the Tigers, may have been among the precipitating events,'' Greenspan said.
The economic distress, in turn, was aggravated by a breakdown in the rule of law, Greenspan said. ''We take for granted that contracts will be fulfilled in the normal course of business, relying on the rule of law, especially the law of contracts,'' he said. ''A key characteristic, perhaps the fundamental cause of a vicious cycle, is the loss of trust.''
Just this week, Malaysian Prime Minister Mahathir Mohamad abruptly slapped controls on currency transactions this week, leaving foreign investors scrambling to extract some of their $10 billion in Malaysian stock and bond holdings.
The restrictions will make it tougher for Malaysia to attract the overseas capital it needs to bolster an ailing banking system and end its first recession in 13 years.
Russia, meanwhile, is suffering from misguided investments made when it was part of the Soviet Union, Greenspan said. ''The preferences of central planners wasted valuable resources by mandating investment in sectors of the economy where the output wasn't wanted by consumers -- particularly in heavy manufacturing industries,'' he said.
Greenspan said ''the phenomenon of overinvestment'' also plays a role in Japan's woes. ''In Japan, the saving rate and gross investment have been far higher than ours, but their per capita growth potential appears to be falling relative to ours. It is arguable that their hobbled financial system is, at least in part, a contributor to their economy's subnormal performance,'' he said.
c Copyright 1998, Bloomberg L.P. All Rights Reserved. |
