BOSTON CAPITAL
End more likely to come with bang, not whimper

By Steven Syre & Charles Stein, Globe Staff, 2/24/2000

emember economic slowdowns and major market corrections?

They were regular features of economic life before we reached Nirvana sometime in the mid-1990s. But with Alan Greenspan's new harder-edge policy at the Federal Reserve, the chances of seeing them again have increased. Greenspan has put the Fed on a collision course with the economy and the stock market, heightening the odds that the current period of perfection will end not with a whimper, but with a bang.

''The ante is higher and the risks going forward are greater,'' said Mark Zandi, chief economist at RFA Dismal Sciences.

Greenspan was back on Capitol Hill yesterday, repeating testimony he gave last week. That testimony is worth reading. Greenspan has been saying for some time that the economy is too strong and that it needs to slow down.

The Fed has raised rates four times now in response to that strength, but so far there is precious little evidence the economy is slowing down. Greenspan isn't happy about that. In his remarks, he sounds the way your father might when he has reminded you four times to clean up your room, but you still haven't done it.

''This time I mean business, young man.''

Greenspan didn't say that. He did say, however, that we have developed a set of imbalances that ''unless contained threaten our continuing prosperity.''

One of those imbalances is the labor market, which is running out of workers to fill open jobs. No one knows how low the jobless rate can go without triggering inflation, but Greenspan and company clearly have decided the current rate, 4 percent, is too low.

The other imbalance is the stock market. Greenspan didn't say stocks have to come down. Yesterday, he said the Fed wasn't specifically targeting stock prices. But he did say the stock market was contributing to the too-strong economy and that asset values - stock prices - should ''increase no faster than household incomes.''

Said Wayne Ayers, chief economist at FleetBoston Financial Corp.: ''The only way he can slow the economy is to take some steam out of the equity market.''

Ayers's metaphor - taking some steam out of the economy - implies a certain level of precision. So does ''tapping on the brakes.'' So does ''soft landing,'' a phrase Greenspan used yesterday before Congress.

The idea is that the Fed has the power to fine-tune the economy and the stock market to bring about the desired results. But does it, really? Or is monetary policy actually a crude instrument that could bludgeon the market and the economy, rather than just poke it?

Thomas O'Neill, chief investment officer at FleetBoston, isn't optimistic. O'Neill believes the technology stock market is a speculative bubble that is bound to burst. ''You just don't let a little air out of a bubble,'' he said.

The fear is that euphoria could give way to extreme pessimism, sending the stock market into a steep dive. Is that likely? Who knows? Is it possible? Why not?

Toppling the economy probably would require a harder push. The US economy expanded at nearly a 6 percent pace in the second half of 1999. The Fed would be more comfortable with a growth rate between 3 and 4 percent.

But could the Fed overshoot and get a more severe slowdown than it wants? Some investors must think so. The stocks that represent the old economy - banks, home builders, retailers, manufacturers - have been in a steep decline for months.

According to Ned Riley, chief investment officer at State Street Global Advisors, the Standard & Poor's index of regional bank stocks is down 36 percent from its 1999 high; the index of home-building stocks is down 43 percent; department store stocks are down 38 percent.

''A lot of these stocks act as if they are discounting a recession-like scenario,'' Riley said. He doesn't foresee that recession. Nor does any other forecaster. But parts of the stock market are nervous, and it is not hard to see why.

The more resistant the stock market and the economy prove to be to Greenspan's efforts to restrain them, the more he is going to have to raise rates to get what he wants. The Fed chairman couldn't have been too happy yesterday when the Nasdaq index soared after he spoke.

The higher rates go, the greater the chance that the desired soft landing turns into a hard one instead. ''We are in uncharted territory,'' said FleetBoston's O'Neill.

Let's hope Greenspan has a map to get us through it.

Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can also be reached by e-mail at boscap@globe.com.

This story ran on page D01 of the Boston Globe on 2/24/2000.
© Copyright 2000 Globe Newspaper Company.

End more likely to come with bang, not whimper!

For use as educational material only!

-- Egalitarian (egalitarian@mail.com), February 28, 2000

Answers

>One of those imbalances is the labor market, which is running out of workers to fill open jobs.

I don't understand why this is so when there are still a number of able-bodied people on welfare in my state and probably the neighboring states, as well. Something is wrong here.

-- (bigmouth@home.now), February 28, 2000.

The thing is there is a vast number of people who are "underemployed" from lay offs back in the early 90's but these people are never counted as "underemployed".

Also there are a great number of people who are basically unemployed who are not counted such as temps. When you are a temp you may go for days or a week or longer without any work until another assignment come in for you to do so you can not count on unemployement (where the records are kept for the great unemployment percentages) so as a temp (excluding IT temps) you just get poorer.

There are major problems but because there is no one keeping records and counting all these people who are in these positions it is never recorded and everything looks hunky dory to the elitelist in DC.

Yeah there has been a big boom on Wall street the past few years for the monied but the common worker has not prospered for the most part.

obo

-- Obo (susanwater@excite.com), February 28, 2000.

Jobs are also not offered to those with experience but have the gray hairs to go with it. Age discrimination is a fact and these folks aren't ready for retirement but are not working, but want to be.

-- Sammie (sammiex0@yahoo.com), February 28, 2000.

There are many people willing to work but most of the jobs are mininime wage. In this economy, who can live on this wage? The top earners get the best and all the other eat bread. Top earner 10% rich others guess.

-- ET (bneville@zebra.net), February 28, 2000.