I'M betting against Alan.Interesting read.
Regards, DH
By MATHEW INGRAM
From Saturday's Globe and Mail
There were probably more prayers than usual being said at Wall Street shrines devoted to Federal Reserve chairman Alan Greenspan this week.
The man some call "The Maestro" told the U.S. Congress in a recent address that the economy is in a "soft patch," but strong growth is likely to resume. In confirmation of that view, the Fed raised its lending rate on Tuesday by a quarter of a percentage point.
The only question now is whether the Fed is right, or whether it increased rates primarily because it was backed into a corner by its previous views on the economy, and is now hoping along with everyone else that the economy turns around. And if it doesn't? The United States could wind up with rising rates and slower growth — in other words, stagflation.
In his testimony, Mr. Greenspan suggested that the soft patch is a short-term phenomenon driven primarily by high oil prices. West Texas intermediate crude hit a record high of $46.58 (U.S.) a barrel yesterday, on fears that even Saudi Arabia doesn't have enough spare capacity to deal with the one-two punch of rising demand in China and supply disruptions in Iraq.
Industry analysts and economists point out that oil is still low when inflation is taken into account; in current dollars, oil was more than $70 a barrel in the 1970s. But this is a little like saying your salary is equivalent to $1-million in 1950 dollars — it doesn't help you much now. The reality is that a $10-a-barrel rise in the price of oil chops about a percentage point off the growth rate of the U.S. economy.
Several market bellwethers also released disappointing quarterly results and lacklustre profit forecasts this week. Cisco Systems said CEOs are more cautious than in the past, while Hewlett-Packard announced a profit shortfall on Thursday that sent the Nasdaq tumbling. The tech-heavy index has fallen more than 9 per cent in the past month, and the Dow Jones average is down 4 per cent.
The U.S. job picture, meanwhile, has gone from hopeful to bleak. Last Friday, the July report missed estimates by a country mile, with just 32,000 jobs created instead of the 200,000 most economists had expected.
Strong growth in April and May gave investors hope that the job picture in the United States was finally beginning to recover, but since then, the figures have been fairly weak. The United States has only created 180,000 jobs a month over the past six months, well below the replacement level.
In the latest series of tepid economic numbers, retail sales for July came in lower than expected Thursday, with a rise of 0.2 per cent once auto sales are excluded, and consumer sentiment also came in below expectations. Yesterday's U.S. trade gap in June (the difference between imports and exports) was much larger than expected, at a record $55.8-billion — prompting Merrill Lynch economist David Rosenberg to revise his forecast for second-quarter GDP "dramatically lower" to 2.5 per cent from 3.5 per cent.
Amid all this weakness, the Fed's rate hike stands out like a sore thumb. In the days leading up to its decision, in fact, some economists recommended that the Fed not raise rates at all. Ian Morris of HSBC said that in light of the economy's weak performance, anemic jobs growth and a spike in oil, "we do not see any economic reason for a rate hike."
The Fed, however, had effectively painted itself into a corner by promising to raise rates. If it failed to do so, not only would its credibility be hurt, but markets would plunge on the assumption that things were even worse than expected.
It's possible that the recent weakness in business and consumer spending is just a summer lull, exacerbated by the rise in oil prices, and that once these factors recede, the United States will see stronger growth. That's certainly where Mr. Greenspan has placed his bets. But the decline of the major stock indexes over the past few weeks shows that many investors are betting he's wrong.
Mathew Ingram writes analysis and commentary for globeandmail.com.
mingram@globeandmail.ca