Economy hits 'soft spot' - Greenspan predicts better days : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Economy hits 'soft spot'

Greenspan predicts better days

Marilyn Geewax and Michael E. Kanell - Cox Washington Bureau

Thursday, November 14, 2002

Federal Reserve Chairman Alan Greenspan predicted Wednesday that the economy will move beyond its current ''soft spot,'' which he blamed on corporate financial scandals and threats of war with Iraq.

In testimony to Congress' Joint Economic Committee, Greenspan stopped short of predicting solid growth. And he acknowledged the continued slump in business investment and said that the consumer ''has been the driving force of this expansion.''

But that drive has been impressive thus far, he said. Most critically, dropping mortgage rates have allowed millions of Americans to refinance mortgages and get the cash to continue buying cars and more, he said.

''A dollar of equity extracted from housing has a more powerful effect on consumer spending than does a dollar change in the value of common stocks,'' Greenspan said.

Yet behind the good news is a caution, said Rajeev Dhawan, director of the Georgia State University forecasting center.

"I heard fear," Dhawan said. "He was saying that if it weren't for cash-outs and refinancing, we'd all be in big trouble."

According to, a research and consulting company, the refinancing boom has injected a record $138 billion into the economy.

However, consumers are no longer the growth engine they once were, Greenspan said.

Because of falling stock prices, job cuts and worries about terrorists, ''consumer spending has slowed over the course of the past year,'' he said. ''Households have become more cautious in their purchases, while business spending has yet to show any substantial vigor.''

Still, Americans have thus far absorbed a series of shocks, from the collapse of tech stocks to terrorist attacks and war.

The economy has proven ''remarkably resilient,'' Greenspan said. Gross domestic product has grown by 3 percent over the past four quarters, ''a very respectable pace given the blows that the economy endured.''

Indeed, he said, the economy should be able to ''come out of this soft spot and to start accelerating."

But Greenspan said a vigorous recovery is far from guaranteed. Efforts to restore investor confidence have been stymied by the turmoil in leadership at the Securities and Exchange Commission. In addition, investors are wary of ''geopolitical risks'' such as a possible war between the United States and Iraq.

No deflation seen

The Fed last week cut the benchmark short-term interest rate to 1.25 percent --- the lowest level in more than four decades. Taking the rate down is meant to boost the economy by making borrowing cheaper and variable loans easier to bear.

If the economy were to come roaring back, the central bank would quickly boost interest rates to keep inflation from flaring up, Greenspan said.

Some economists have warned that the opposite is more likely, but Greenspan said the Fed is alert for signs of declining prices. So far, ''Our conclusion is that we are not near a deflationary cliff.''

Chances of deflation are ''extraordinarily remote,'' Greenspan said.

Still, skeptics worry that cutting the rate to 125 "basis points" has left the Fed with few alternatives at a time that the nation's economy remains weak.

"All of our eggs are in one basket," argued Gary Shoesmith, director of the Center for Economic Studies at Wake Forest University. "If there's another terror attack, if war in Iraq goes badly, if there is a collapse of the stock market, the Fed has 100 basis points and they will be out of business."

Still, Greenspan maintained that even if interest rates hit zero, the Fed still could stimulate the economy by buying Treasury securities, he said.

''There is virtually no meaningful limit to what we could inject into the system, were that necessary,'' he said.

Greenspan said that making permanent the tax cuts passed in 2001 would not boost the economy because investors already expect Congress to do that. However, failure to make the tax cuts permanent would disappoint investors and possibly harm the stock market, he said.

Spending to rise

Greenspan predicted business spending will improve soon as companies begin to reap the profits of rising productivity. Because of new technologies, the increase in the rate of worker output per hour ''has not yet faltered.''

President Bush agreed that the economy is underperforming but will improve.

''He uses the word 'soft spot.' I use the words 'bumping along.' Both of us understand that our economy is not nearly as strong as it's going to be," Bush told reporters at the White House. ''Our job here in Washington is to create the environment necessary for people to feel confident about risking capital.''

But where will growth come from?

The number of applications for mortgages dipped 4 percent last week.

Although the sector remains strong, "the refi boom is unwinding, and demand for housing is largely spent up," said economist Celia Chen of

Earlier this week, the Business Roundtable, an association of top executives, released a survey that threw cold water on hopes for a surge in corporate spending. More than two-thirds of chief executive officers expect growth to come in at a feeble rate of less than 2 percent in 2003, the group reported.

"I just think that if the housing market turns flat, if auto sales go down --- as is happening --- there goes the major support for the economy," said Raymond F. DeVoe Jr., independent market strategist. "It may not be a 'double-dip' recession, but it will be more stagnation."

-- (Life@in.2002), November 16, 2002


An economy the Fed can't fix

In a recession unlike any other, rate cuts and fiscal stimuli haven't helped. Is time the only cure?

January 28, 2003: 6:24 PM EST

By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - You wouldn't expect your plumber to be much help in setting a broken bone. You wouldn't think your dentist would be much help with your leaky roof.

Maybe it's time to stop thinking the Federal Reserve or the fiscal stimulus getting cooked up in Washington can do much to resurrect an economy that seems more Japanese by the minute.

No, that's not the majority view right now: Thanks to the beauty of easy money and a great big stimulus package, economists surveyed by the Philadelphia Fed think that by the end of the year the economy will be growing at a 4.2 percent annual rate, the unemployment rate will have fallen from the current 6 percent to 5.8 percent and U.S. corporate profits will be up by 10 percent.

But the experience so far casts some doubt on such a happy outcome. Consider how little has come of the Fed cutting the fed funds target rate to 1.25 percent from 6.5 percent just over two years ago, or the tax rebate that got doled out to U.S. households in 2001.

And yet the economy is barely inching along -- economists surveyed by think gross domestic product grew at a rate of only about 0.9 percent in the fourth quarter. Yes, some of that weakness is likely related to Iraq, and some is likely due to the scandals that wracked Corporate America last year. But again, the Fed's taken the funds rate down to its lowest level in 40 years. Shouldn't that count for something?

"When you think of all the fiscal and monetary stimulus we've had, we should have the economy growing at 5 or 6 percent," said David Rosenberg, chief North American economist for Merrill Lynch. "The fact that we're not is the story."

The wrong wrench

The problem, thinks Rosenberg, may be that the tools the Fed and the White House have at their disposal aren't appropriate for the job at hand.

Until now, every recession in the post-World War II era was tied to some sort of falloff in demand -- typically because the Fed had zigged, keeping rates too high, when it should have zagged. The solution to the problem of softening demand is to put money in buyers' hands. Lowering interest rates, and thus bringing borrowing costs down, is a great way to do that. So is putting $300 checks in people's mailboxes.

But the current downturn is unlike other downturns because its root was not a falloff in demand, but an investing bubble that led to more capacity (supply, if you think of it) than the economy could possibly sop up. Thanks to the readily available money pumping through the economy during the go-go '90s, Corporate America spent like crazy on new plants and equipment that it didn't really need. The hangover is that now companies are only operating at about three-quarters of capacity, according to the Federal Reserve.

"Basically we made a lot of ill-advised investments," said Northern Trust chief U.S. economist Paul Kasriel. "We need to readjust the economy, and cheap credit isn't necessarily going to be the way to do that."

In short, according to Napier Investment Advisors head Ron Napier -- Salomon Brothers' chief Asian economist in the 1980s -- the United States' problems continue to look very much like Japan's.

The seeds of Japan's economic downturn, too, was a busted bubble, a four-year frenzy of stock market and real estate speculation that ended in 1990. The Japanese response to that downturn was a series of economic stimulus packages and the Bank of Japan's eventual dropping of overnight rates to the zero bound. The first of the big stimulus packages, Napier points out, came a decade ago, in 1993, and as with all the packages that followed, the economy's response was underwhelming.

"The reaction to their stimulus efforts have always been less than policy makers expected," said Napier. "In normal times those things are supposed to work, but the aftermath of a bubble is not normal."

Japan's problems continue largely because of the government's unwillingness to deal with chronic overcapacity. There are still too many "zombie" companies -- department stores, construction firms, and the like -- being kept alive because of the unwillingness of Japan's banks and the government to see them fail. This has in turn led to problems at the banks (which themselves are struggling with overcapacity). And, inevitably, demand, too, has been hit, as a weakening job climate curtailed consumers' willingness to spend.

Obviously the Fed hopes it won't come to that, but it's unclear what the Fed can do besides keep rates low and keep printing money in the hope that the United States' overcapacity issues resolve themselves more quickly than Japan's.

"It's really just a waiting game," said Arnhold & S. Bleichroeder economist James Padinha. "You can't expect excesses to be done correcting just because you want them to be done correcting."

-- (debt@nd.deflation), February 02, 2003.

It looks as if someone is trying to censor this thread.

-- Say (no@to.censorship), February 10, 2003. ex=1047186000&en=b3da4512c7a908fa&ei=5062&partner=GOOGLE

New York Times

March 1, 2003

Fed Official Defends Rate Cuts


WASHINGTON, Feb. 28 A top Federal Reserve official tonight provided the central bank's most extended defense yet against critics who have warned that its policy has fostered a bubble in housing prices and auto purchases that might pop as abruptly as the stock market bubble did nearly three years ago.

"It makes sense to build the houses and cars now, when the cost of doing so is relatively low, rather than waiting," Donald L. Kohn, a Fed governor, said in remarks prepared for delivery tonight at a conference in San Francisco.

Though acknowledging that housing prices have soared, largely because of the Fed's drastic reduction of interest rates, Mr. Kohn argued that neither the supply of housing nor home prices were "out of line with what might be expected."

Mr. Kohn's remarks came on the heels of similar but more generalized comments by Alan Greenspan, the Fed chairman, with whom Mr. Kohn has close ties.

Tonight, Mr. Kohn seemed intent on reassuring investors that a market meltdown was unlikely and also on rebutting criticism that the Fed's attempt to prop up a weak economy with low interest rates might be creating other problems down the road.

The Fed has lowered interest rates 12 times over the last two years, bringing the federal funds rate on overnight loans between banks to 1.25 percent, the lowest level in 41 years.

That policy has created a surge in the purchases and prices of homes as lower interest rates allowed people to borrow much more than they would otherwise be able to afford. It also helped shore up consumer spending, which has been the only real source of economic growth for some time as car companies offered zero percent financing deals and homeowners pulled cash out of their homes through home-equity loans.

But at least some analysts have been worried that housing prices could be poised to crash, if only because they have been rising much faster than either inflation or personal income.

Another worry is that both home-building and car production could stall badly once interest rates begin to climb back to more typical levels.

Mr. Kohn acknowledged that higher interest rates could dampen the purchases of both houses and durable goods like cars and appliances, but he added that interest rates would head higher only in response to more buoyant economic growth.

"The question is whether the stimulus to household investment, while cushioning the economic cycle in the near term, is setting the stage for greater instability in the longer run," Mr. Kohn said.

The answer, he contended, is probably not. The boom in car sales, he said, has not required the construction of factories and has thus not led to overinvestment in machinery or equipment.

And while acknowledging that the prices of existing homes have "skyrocketed" much faster than personal income in most markets, he said the lower interest rates had kept homeowners' monthly mortgage payments at manageable levels.

"Although house prices outpaced income through much of the 1990's, housing remained quite affordable by historical standards," Mr. Kohn said. And while spending on houses and cars might well moderate in the future, he said, "they do not appear set to replicate the experience of fiber optic cable."

-- What_the (Fed@is.saying), March 01, 2003.

Fed raised deflation worries in March

By Associated Press, 5/9/2003

WASHINGTON -- Federal Reserve policy makers privately expressed concerns about deflation at their meeting in March, seven weeks before they first raised the issue to the public, according to minutes of the meeting released yesterday.

The Fed's worries about deflation -- a prolonged bout of falling prices -- at its March 18 meeting is noteworthy because at its next meeting, which occurred Tuesday, policy makers took the unusual step of saying it was concerned about the possibility of the country experiencing deflation.

Given that worry, and against that backdrop of listless economic growth, Federal Reserve chairman Alan Greenspan and his colleagues signaled Tuesday they stood ready to reduce short-term interest rates to ward off even the threat of deflation.

Rest of the story here

-- (, May 11, 2003.

"Whether you want to call it disinflation or deflation, pricing power is receding right across the board," said David Rosenberg, chief North American economist at Merrill Lynch in New York.

"It is becoming painfully obvious that the bigger story here is one of pervasive global excess capacity." USUS/TPBusiness/TopStories

-- (Long@term.trends), May 17, 2003. nancial/AP.V6400.AP-Fed-Interest-Ra.html

Fed Trims Interest Rate to 45-Year Low

...analysts said that by continuing to mention the remote threat that the country could face a period of falling prices--deflation-- the Fed was signaling that it would keep interest rates down.

``The clear message is that rates are going to stay low for some time,'' said David Wyss, chief economist at Standard & Poor's in New York.

Many economists believe the combination of the lowest interest rates since the late 1950s and President Bush's new round of income tax cuts will finally be enough to spur stronger economic growth starting in the second half of this year but not before the unemployment rate, currently at a nine-year high of 6.1 percent, edges up a bit more.

The rate cut, which the Fed approved by an 11-1 vote at the end of a two-day meeting, pushed the funds rate, the interest that banks charge each other on overnight loans, from 1.25 percent to 1 percent...

-- Rates (how_low_can@they.go), June 25, 2003. pid=10000103&sid=aczp8tvPf46o&refer=us


July 16 (Bloomberg) -- U.S. industrial production rose for a second straight month as factories built more consumer goods and cars, and consumer prices excluding food and energy held steady for the third time in four months.

The production increase ``certainly indicates that the decline of recent months has stabilized,'' Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee today in his second day of testimony to Congress...

-- (Fl@t.prices), July 19, 2003.

From Alan Greenspan's July 15 testimony,0,6778739.story?coll=ny- business-headlines

"Inflation developments have been important in shaping the economic outlook and the stance of policy over the first half of the year. With the economy operating below its potential for much of the past two years and productivity growth proceeding apace, measures of core consumer prices have decelerated noticeably. Allowing for known measurement biases, these inflation indexes have been in a neighborhood that corresponds to effective price stability--a long- held goal assigned to the Federal Reserve by the Congress. But we can pause at this achievement only for a moment, mindful that we face new challenges in maintaining price stability, specifically to prevent inflation from falling too low.

This is one reason the FOMC has adopted a quite accommodative stance of policy. A very low inflation rate increases the risk that an adverse shock to the economy would be more difficult to counter effectively. Indeed, there is an especially pernicious, albeit remote, scenario in which inflation turns negative against a backdrop of weak aggregate demand, engendering a corrosive deflationary spiral.

Until recently, this topic was often regarded as an academic curiosity. Indeed, a decade ago, most economists would have dismissed the possibility that a government issuing a fiat currency would ever produce too little inflation. However, the recent record in Japan has reopened serious discussion of this issue. To be sure, there are credible arguments that the Japanese experience is idiosyncratic. But there are important lessons to be learned, and it is incumbent on a central bank to anticipate any contingency, however remote, if significant economic costs could be associated with that contingency."

-- (, July 27, 2003.

Financial Times

Bond chaos hits US mortgage giants

By Jenny Wiggins in New York

Published: August 3 2003 21:40 | Last Updated: August 3 2003 21:40

Chaos in the bond market, triggered by a steep rise in government bond yields, has worsened troubles at Freddie Mac and Fannie Mae, the US mortgage financiers.

Their funding costs have increased sharply in the past week as the value of their debt deteriorated due to an extraordinary rout in the mortgage securities markets.

Investors in mortgage securities had their worst month since March 1994 in July, with losses of 2.6 per cent, Lehman Brothers said, as a surge in government bond yields and mortgage rates sparked heavy selling.

Mortgage securities pool mortgage loans. As mortgage rates rise, the value of existing securities declines because new securities are created, pooling mortgages that carry the higher rates.

Bond yields have risen at their fastest for more than 20 years over the past month, last week touching one-year highs. The rise has been exacerbated by mortgage-related hedging.

When mortgage rates rise, fewer homeowners refinance their mortgages, lengthening the period over which investors can expect to receive income. To compensate for this extra income, mortgage investors sell Treasury securities or interest rate derivatives known as "swaps". Swap spreads last week widened 30 basis points, coming close to levels last seen when hedge fund Long Term Capital Management collapsed in 1998...

-- (, August 03, 2003.


Fed Questioned After Bond Market Rout

Sat August 9, 2003 07:45 AM ET

By Tim Ahmann

WASHINGTON (Reuters) - The blame game in the wake of the bloodiest U.S. bond market rout in nearly a decade is in full swing and many of the fingers are pointed at the Federal Reserve.

Accusations are flying that the central bank overplayed its concerns on deflation in a manipulative effort to push long-term interest rates lower to goose the economy.

Now the Fed has been "caught out" -- as Melvyn Krauss of the Hoover Institution put it in an opinion piece in the Wall Street Journal on Friday -- some argue its credibility has been damaged.

"The Fed whipped up a positive frenzy about deflation," said James Grant of Grant's Interest Rate Observer. "To my mind not the least of the sins of the Fed in this period was its cavalier willingness to suppress, manipulate and distort what had been more-or-less free prices."

But other analysts say misplaced market bets in the rally that preceded the meltdown may have been more the result of an unusually open Fed debate and a complex policy message than an intention to deceive.

"The Fed didn't set out to consciously screw over markets," said Adam Posen, a former New York Fed researcher now with the Institute for International Economics.

"Because the Fed is moving to a more transparent regime and therefore is communicating when things are uncertain or when things are contingent, they are more open to being accused of being inconsistent," he said. "People are just not ready to deal with that yet."


The roots of the current schism trace back to November when Fed officials first began to speak of how they could ward off a potentially crippling decline in consumer prices in the event they ran out of room to cut short-term interest rates.

The then-listless economy had the Fed preparing to cut overnight rates to a fresh four-decade low of 1.25 percent.

Officials have said their exploration of how best to fight deflation was merely prudent due diligence and their frequent public discussion over alternative policy tools, such as buying Treasury bonds to pull long-term rates down, was simply an effort to educate markets and the public.

As talk about unusual deflation-fighting steps reached a crescendo in mid-June, the yield on the benchmark 10-year Treasury note touched a 45-year low of 3.07 percent.

But when the Fed met later that month, it cut short-term rates by a modest quarter point and made no reference to the possibility of departing from traditional policy tools.

That June 25 decision disappointed investors who had bet the Fed was edging toward buying Treasury bonds -- and the selling began.

Things got uglier in mid-July when Alan Greenspan made the central bank's thinking plain: if further stimulus was needed, overnight rates would be the tool. He told Congress chances were slim the Fed would need turn to other measures.

The selloff did not cool until last week, after the yield on the 10- year Treasury note nearly reached 4.6 percent. The yield now is hovering above 4.2 percent.

"Price action in the last few weeks reveals that the bulk of the pupils flunked the mid-term exam," economists at Credit Suisse First Boston wrote after Greenspan's testimony. "When the bulk of the pupils fail the test, we are inclined to assign considerable blame to the teacher."

Former Fed governor Lyle Gramley agrees the Fed has had trouble communicating but disagrees with those who say the central bank's credibility with the markets is shot.

He said the biggest problem was that the Fed's current message has mixed implications for bonds. It plans to keep short rate low for a prolonged period -- a bond positive -- but it wants to push up a too- low inflation rate -- a negative.

"The Fed is in uncharted territory here, so is the market, and trying to communicate the message and getting it correct is inherently very difficult in these circumstances," he said.

-- (, August 10, 2003.

Grim US jobs data a reminder Fed rates staying low

Fri September 5, 2003 03:03 PM ET

By Victoria Thieberger

NEW YORK, Sept 5 (Reuters) - The bleak state of the U.S. jobs market, despite stirrings of an economic rebound, reminded financial markets on Friday that the Federal Reserve will be extra slow to raise interest rates in this recovery.

The August payrolls report, which showed the seventh straight month of job cuts for a total of nearly 600,000 lost this year, came in stark contrast to recent upbeat economic news that fanned fears in financial markets the Fed would start lifting interest rates next spring.

But officials at the U.S. central bank have been at pains to say they intend to keep interest rates near current 45-year lows for some time. Six senior Fed officials -- about one-third of the policy- setting Federal Open Market Committee -- spread out across the nation on Thursday to reinforce that message.

They tried to allay fears in the bond market that stronger economic growth will trigger an automatic reflex from the central bank to jack up interest rates, as it has in the past.

That is because inflation is so low, running at about 1 percent, and the Fed is worried that it could slip further. That has not been the case in previous post-war recoveries.

"The payrolls report highlights the current predicament very vividly, which is accelerating economic activity with mounting job losses," said Banc One Capital Markets senior economist Anthony Karydakis.

"This is a wake-up call. Until now, the (bond) market seemed to assume the economy is coming back, therefore inflation is coming back and the Fed is going to be tightening."

more of the story

-- (declining@pay.rolls), September 06, 2003. storyID=3455240&type=economicNews

Underlying U.S. inflation slows to 37-year low

Tue September 16, 2003 04:05 PM ET

By Eric Burroughs

NEW YORK, Sept 16 (Reuters) - Underlying U.S. consumer prices rose at the slowest annual rate in 37 years in August, the government said on Tuesday in a report that highlighted the Federal Reserve's worries about "undesirably low" inflation.

The main Consumer Price Index rose 0.3 percent in August, below economists' forecasts of a 0.4 percent gain despite a surge in energy costs, the Bureau of Labor Statistics said.

The core CPI, which strips out the impact of volatile food and energy prices, rose just 0.1 percent on the month. On a year-over-year basis, the core CPI, which is viewed as a better gauge of inflation trends, slowed to a 1.3 percent rate in August from 1.5 percent in July.

The data suggested the economy is not yet safe from the dangers of deflation even as it enjoys a burst of growth. For that reason, the Fed repeated at a policy meeting Tuesday that it would keep its federal funds rate at a 45-year low of 1 percent for a "considerable" amount of time.

For the past year, the annual rate of core inflation has been cut almost in half, dropping from 2.4 percent to its current low, not hit since 1966. Some Fed officials, like Governor Ben Bernanke, have said the large amount of slack in the economy means that pace will ease further next year.

To prevent the inflation slowdown from turning into a persistent decline in prices, or deflation, Fed officials have vowed to keep interest rates low or cut them more, if needed.

"For the United States, the disinflationary trend continues. This portrays an economy operating with a lot of slack, that is, unused capacity. As a result, the Fed will continue to be concerned with the risk of deflation," said Sal Guatieri, senior economist at BMO Financial Group in Toronto.

"Therefore it will continue to hold interest rates low despite expected strong growth in the quarters ahead," he said.

The unemployment rate stands near a nine-year high of 6.1 percent and the economy shed 93,000 jobs last month. The industrial sector is using only 74.6 percent of its capacity, a 20-year low, and most economists believe that until economic growth expands briskly for several quarters to soak up that slack, inflation will keep declining.

Part of the reason is that productivity remains so strong, meaning companies can efficiently make more goods and offer services without hiring, and even continue to get rid of workers. Economists fear that ongoing lay-offs could cut short the current rebound.

"You could still have growth for a while without any job growth," said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago. "If you don't have any employment growth, you're not going to have enough income growth to sustain the recovery down the road." ...

-- (, September 16, 2003.

...The Dallas Fed chief cited a number of reasons for his optimism on the economic outlook: the Fed's low-interest rate policy, "very stimulative" tax cuts, a rising stock market, lower risk spreads on corporate debt and a weaker dollar.

"Strong dollars help your standard of living and help consumers, weaker dollars help your producers and exporters. It had been strong a long time, so probably that relief is not a bad thing," he said, without making clear whether he was referring to a sharp slide in the dollar's value in the past two days.

While Broaddus warned on disinflation risks, he expressed confidence the Fed could sustain what he termed the current period of price stability and steer clear of deflation, an outright decline in the overall level of consumer prices that could hamstring the economy.

"It does not imply that further disinflation is a certainty, that it's inevitable or that the Fed is not able to address it effectively with monetary policy," Broaddus said of his warning.

"I think the risk that we will fall into actual deflation is quite small, not nonexistent, but quite small," he said. "It's important to understand that if we did, the Fed is fully capable of dealing with it."

(Additional reporting by Andrea Hopkins in Washington and Juliet Terry in Charleston)

-- Tidbit (, September 24, 2003.


Posted 10/30/2003 11:10 PM Updated 10/31/2003 2:56 AM Economic rebound or temporary reprieve?

By Barbara Hagenbaugh, USA TODAY

WASHINGTON The economy sprinted in the third quarter at a blistering 7.2% annual rate, a pace not seen in nearly two decades. But can it last?

By Dan MacMedan for USA TODAY

While many economists are optimistic the third-quarter jump was a turning point, some wonder if it was a temporary surge brought on by tax cuts, mortgage refinancings and a resumption of economic activity after the first part of the war in Iraq came to a close. (Related story: 7.2% GDP growth fastest in 19 years)The next few quarters will be a critical test for the nation's companies and workers. If the economy continues to grow strongly, it will mean increased jobs and wealth. If not, the sluggish state in which the U.S. economy has been mired for the past three years will continue to leave millions unemployed.

"The question is: Is the economy just living off of a sugar high from tax cuts and mortgage refinancings in recent months?" asks Stuart Schweitzer, global markets strategist for J.P. Morgan Fleming Asset Management. Although Schweitzer believes the economy will continue to improve, he notes, "It's too soon to know for sure."

Continued job market weakness is considered the biggest risk for the economy. Even with a gain in September, the economy lost 41,000 jobs in the third quarter. Nearly 9 million workers were counted as unemployed in September. Scores of others had quit looking for a job or were working part time because they couldn't find full-time work.

CEOs are skittish after seeing other pickups in the economy in recent years fizzle. But if they don't begin to hire soon, recent gains in consumer spending, which accounts for 70% of all U.S. economic activity, will likely fade, reducing corporate profits and weakening the overall health of the economy.

One thing is clear: Even if the third quarter turns out to be the beginning of a healthy trend, those expecting a return to the euphoric days of big raises and dot-com riches will be disappointed.

"I don't think we're going to have a boom, but I think we are going to have a very good economy," says Lyle Gramley, a former Federal Reserve governor now at Schwab Washington Research Group.

Improvement is being seen across the country and across a broad range of sectors.

The California Wine Club, a "wine of the month" club that distributes bottles from mom-and-pop wineries in California, saw pre-Christmas gift orders jump 80% to a record this year. Not only did the number of customers rise, but spending per gift more than doubled.

"It's about time," says Bruce Boring, owner of the Ventura, Calif.- based firm. "It's been three years of pretty horrible results." Since pre-holiday orders typically are a good indicator of in-season sales, Boring is hiring 16 full-time, temporary workers. Last year, he brought in only five.

Whether enough momentum gets going to create jobs is the key question for consumer spending and the economy as a whole, as job security is the No. 1 influence on spending.

In September, 57,000 jobs were added to the economy, the first gain since January. Although that was welcome, it's believed that 150,000 or more jobs need to be added each month to put a dent in the unemployment picture.

"There's a modestly good argument to be made that people are losing jobs with somewhat less frequency ... it's a harder case to make that they are getting jobs with greater frequency," Goldman Sachs senior economist Ed McKelvey says.

David Moran, 56, has been out of work for 20 months. The tech writer says it seems like the number of job openings is rising. But for every job that opens up, there are hundreds waiting in line to fill it. "Things may be turning, but when they say it's a jobless recovery, it certainly is true," says the Lincoln, Mass., father of two.

CEOs in the past few years have figured out how to automate as much as possible and how to squeeze as much work out of remaining employees as they can. After seeing how much those changes have boosted bottom lines, many firms will likely be reluctant to add workers.

Higher health insurance costs are also considered a hindrance to hiring. In the last three years, employers' contributions for health care have risen about 35% on average, according to the Kaiser Family Foundation/Health Research and Educational Trust.

"It raises the bar in terms of growth, what it actually takes to get companies to step forward and say, 'OK, we need to hire, and we need to spend,' " Merrill Lynch senior economist Kathy Bostjancic says.

So far, the job outlook is mixed.

A recent survey of members of the National Federation of Independent Business showed that despite a dip in small business hiring plans in September, the hiring outlook was brighter than earlier in the year. A second report from the National Association for Business Economics out Wednesday, however, showed firms barely increased their hiring plans in October despite reporting large gains in overall demand.

Data are showing an increase in the use of temporary workers often considered a precursor to actual hiring suggesting a gain might be around the corner.

"We've seen the peak in the unemployment rate," says Credit Suisse Asset Management U.S. economist Kathleen Camilli. She says hiring is already picking up significantly.

"Companies are, by and large, at the end of the rope of, 'We'll just have people work a few more hours'," says James Smith, chief economist at the Society of Industrial and Office Realtors. "You can't avoid hiring more people to satisfy that level of demand."

Not so for Jennifer DeGlopper. The president of, a computer cable and connection equipment seller in Waukesha, Wis., has cut 12 workers in the past few years and is down to two employees, including herself. Before, operators took orders and answered questions by phone. Now, computers process orders and her Internet site tries to offer answers to common problems.

Even though sales are up 20% from a year ago, DeGlopper has no plans to hire. "We don't need the people, sadly, but it's (cutting jobs) something that we had to do to survive," she says.

Will consumers continue spending?

Janet Gray, owner of Two Roads Fitness, an online women's workout retailer, says sales were up 75% in the third quarter compared with the same three months last year.

"Things are just a little bit more settled down than they were a few months ago," Gray says from her office in St. Paul. She expects a good Christmas season.

The National Retail Federation projects holiday retail sales this year will rise 5.7% to $217 billion, the biggest gain since 1999.

But some retailers, who typically make about a fourth of their annual revenue during the holidays, are less optimistic about what will happen come January.

"Most people I talk to, they don't sound pessimistic, but they don't sound optimistic, either, so I don't think their spending is going to change much," says Doug Morris, owner of Little Hands Toy Shop in La Grange, Ill. He's shutting down one of his two stores in response to slow sales.

Some economists are also skeptical the big gains in consumer spending will continue. Both Merrill Lynch and Goldman Sachs are anticipating a fairly dramatic slowdown in spending, arguing recent gains have been a one-time boost in response to the tax cuts package passed in late May.

Not only did workers see their withholding taxes cut midyear, but $14 billion in child tax credit checks hit mailboxes right before the back-to-school shopping season, another big time for retailers. It also came as anxiety about the war with Iraq dissipated.

Both Merrill Lynch and Goldman Sachs figure consumers spent about three-quarters of their tax cut money far more than anyone expected and much more than after the 2001 tax cuts.Since so much was spent right away, large gains in consumer spending are unlikely, because the pent-up demand has dissipated, economists at both Wall Street powerhouses reason.

That prediction comes despite huge anticipated rebate checks that are expected to hit consumers' mailboxes in the first half of 2004. A lot of that money will be used to pay holiday debt or will be saved, some economists say.

Others point to declining demand for mortgage refinancings, arguing that increased spending by homeowners in response to lower monthly mortgage payments will also fall off as refinancings ebb.

Refinancing applications have fallen by three-fourths since hitting a record high in early June, according to the Mortgage Bankers Association.

Not everyone agrees consumer spending will fall.

"Once the economy gets rolling along, you have a self-reinforcing mechanism develop in which consumers get more optimistic as they see ... unemployment going down, and they begin to spend more," Schwab's Gramley says.

"Businesses see their sales and profits going up, and they begin to invest more. The stock market goes up, and that makes everyone happier. And the whole thing develops a self-sustaining momentum."

Business spending has been missing

In addition to hiring and spending, economists are going to be watching closely to see if gains in business investment, long missing from the economic recovery, continue.

Despite the sharp gain in the third quarter, there are few signs that businesses are gearing up to spend. Commercial lending at banks is at the lowest in five years, according to Federal Reserve data. Although some of the lending decline can be explained by technical factors, the trend is discouraging.

"Measures of bank lending have yet to show any firm sign of improvement," says Carl Tannenbaum, chief economist at LaSalle Bank in Chicago.

Measures of bond market activity are mixed. Bond issues for high- grade firms are up 4% from last year. Issues for lower-grade debt, however, have doubled.

"The reins on employment and capital spending are still pretty tight," Bostjancic says.

But some improvement is being seen. "We're starting to see people make an investment again in infrastructure that they haven't been doing in the past 18 months," says Paul Evans, president of Net\Works, a firm that builds computer systems for small and midsize companies in Fridley, Minn.

The key question for him is: "Have they put it off for so long that they have to do it? Or do they want to do it?"

If businesses are investing by choice, that would be a much better sign for future spending. After being flat for a year and a half, the company saw profit in the third quarter. If business picks up much more, Evans says, he will have to hire workers after cutting his workforce by 10% in the past few years.

"If we see fourth-quarter growth, I'm going to turn into an optimist real quick," Evans says.

-- Update (on@the.economy), October 31, 2003.

Where has all the money gone?

Commentary: Trends suggest possible U.S. liquidity trap

By Dr. Irwin Kellner, CBS

Last Update: 9:28 AM ET Nov. 18, 2003

CBS MarketWatch

...After rising continuously during the first eight months of this year, the major versions of the money supply have been contracting ever since. M2, which consists of cash, checking and most consumer deposits, has been shrinking since the middle of September; its 13- week rate of change has gone negative for the first time since 1995.

M3, which adds large time deposits, eurodollars and other items, and even MZM, which includes all kinds of accounts on which checks can be written, also are shrinking, having abruptly changed direction in the past two months.

If this decline in the money supply were to continue, it could restrain economic activity -- not to mention pull the stock market down. Indeed, the recent slowing in consumer spending and the pullback in stock prices may very well be the first signs that the economy is becoming parched for liquidity.

Reasons why

So what's to account for why the money supply falling at a time when the Fed has pushed short-term interest rates down to 45-year lows and maintains loud and clear that it is pursuing an accommodative monetary policy?

The first thing that comes to mind is that the Fed doesn't have total control over the money supply, so its decline may be a reflection, rather than a cause, of a weakening in economic activity...

More here

-- Liquidity (, November 22, 2003. ex=1073883600&en=8b915f296c5478ad&ei=5040&partner=MOREOVER

Greenspan Says Recovery Vindicates Fed's Actions


Published: January 4, 2004

SAN DIEGO, Jan. 3 Alan Greenspan, the chairman of the Federal Reserve, claimed victory on Saturday in the Fed's three-year battle to limit the damage from the 1990's stock market bubble.

Speaking to an annual conference of economists here, Mr. Greenspan suggested that the current economic recovery had vindicated the Fed's decision not to try to prevent the bubble but rather to react to its aftermath.

"There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences, rather than the bubble itself, has been successful," Mr. Greenspan told the American Economic Association's annual meeting.

"Despite the stock market plunge," he said, "terrorist attacks, corporate scandals and wars in Afghanistan and Iraq, we experienced an exceptionally mild recession, even milder than that of a decade earlier."

The remarks served as further evidence that many Fed officials believe that the economy is stronger than it has been at any point since it fell into recession in early 2001.

Although the economy has grown rapidly in recent months, the Fed's benchmark short-term interest rate remains at an an almost 50-year low of 1 percent, but analysts expect it to rise this year.

Though economists widely praise the Fed's aggressive cutting of the rate since January 2001, Mr. Greenspan's sunny views are not universally held.

Some economists note that while the recent recession caused only a slight decline in economic output, the loss of jobs was the worst in 20 years. These economists say that even without raising the benchmark rate more than the Fed did in the late 1990's, Mr. Greenspan might have been able to restrain the bubble and its painful aftermath by speaking about it more forcefully or by tightening borrowing requirements for investors.

The Fed's rate directly affects the rates on many credit cards as well as small business and other loans and indirectly changes mortgage rates. By reducing its rate, the Fed makes borrowing less expensive and encourages spending by households and businesses. It raises the rate when officials worry that the economy is growing rapidly enough to cause inflation to accelerate.

In his remarks, which reviewed the Fed's monetary policy since the 1980's, Mr. Greenspan acknowledged that the Fed had not been infallible in recent years.

Some Fed officials had argued for even quicker rate cuts than Mr. Greenspan had wanted in 2002 and early last year. Those officials said that the economic excesses of the 1990's were still weighing on the economy.

The setting of interest rates is "an especially humbling activity," Mr. Greenspan said. "Uncertainty characterized virtually every meeting of the Fed's policy committee."

He added that from time to time, the committee "made decisions, some to move, some not to move, that we came to regret."

-- End (of@this.story?), January 04, 2004.,,date:04-15- 2004~menuPK:34461~pagePK:34392~piPK:34427~theSitePK:4607,00.html

Headlines for Thursday, April 15, 2004

IMF, OECD See Economic Risks In US Budget

Two international economic watchdogs warned that President Bush's budget plans will make the US and other countries poorer in the long run, with one of them suggesting a variety of tax increases to tame the deficit, the Wall Street Journal reports.

The IMF said that the willingness of the US to run a large deficit "provided important support" to the US and world economic recoveries and so far hasn't pushed up long-term interest rates. But in the long run, it said, deficits will soak up limited savings, driving up interest rates and "crowding out" investment, thus slowing growth.

Separately, the Paris-based Organization for Economic Cooperation and Development said taxes might have to rise to balance the budget. While Bush administration officials claim that would endanger the economy, the OECD disagreed: "The removal of fiscal stimulus no longer imperils the recovery."

Also reporting, the Irish Times adds a chapter from the IMF's World Economic Outlook, to be released in full next week, says that US fiscal and current account imbalances must be rebalanced and that an orderly rebalancing of global economic imbalances requires fiscal stabilization in the US as well as efforts to promote demand growth abroad.

The IMF expresses concern about the Bush administration's plans to cut the deficit in half by 2009, relative to the 2004 baseline, pointing to "a series of somewhat optimistic assumptions about government operations". These include no cost to US taxpayers from peacekeeping operations in Iraq beyond 2004, a strict containment of spending other than on defense and homeland security, and the assumption that tax revenues will jump and that there will be no reform of the Alternative Minimum Tax. The IMF points to estimates by the US Congressional Budget Office that suggest the US deficit will remain largely unchanged over the next decade.

Dow Jones says the IMF estimated the reversal in the US budget position from the fiscal-year 2000 surplus of $236 billion to the projected 2004 deficit of $521 billion amounts to about 6 percent of world gross savings. Experience suggests that foreign interest rates move in step with US rates, implying that foreign countries will also pay a price for US deficits, the IMF said.

Emerging-market countries with high debt have most to fear, the IMF said. "Higher US interest rates tend to reduce net capital inflows into emerging markets, (and) worsen fiscal positions, since much emerging-market public debt is indexed to US or world interest rates," the IMF said. In emerging markets where exchange rates are linked to the dollar, higher U.S. rates often lead to intervention that tightens monetary policy, the IMF said.

The risks to US and global financial stability are even more serious viewed in light of the current heavy US dependence on foreign financing, reflected in the large U. current account deficit, the IMF said.

Commenting in an editorial, the Financial Times says as the global economy recovers, diminishing the need for fiscal stimulus, the White House must fix its long-term deficits. Correcting them will be harder than in previous episodes, since the US faces the spending pressure that will come when the baby boom generation retires. But it is a task that, for everyone's sake, cannot be avoided.

Meanwhile, AFP reports the IMF report said the Chinese economy can sustain its 25-year expansion at a rapid clip of six-to-nine percent a year, and its impact on the rest of the world will be deep.

Failure to reform, however, would spell trouble for China, which has expanded at an average rate of more than nine percent a year for two and a half decades. "Looking ahead, further implementation of key structural reforms could allow China to maintain economic growth of about six to nine percent although setbacks in the reform process would carry serious downside risks to the growth outlook," the WEO said.

In the long-run, China was likely to play a bigger global role than any of the other post World War II economic powers such as Japan, or Southeast Asian nations, said the report by IMF analysts. China itself stood to gain the most from its integration with the world economy, the Fund predicted. But other countries also would benefit overall, even if some sectors suffered, it said.

-- (M@rket.trends), April 16, 2004. arry18.html

Inflation tamer has forecast for growth

By John M. Berry

Bloomberg News

...Aside from truly taming inflation, Parry said that since the mid- 1980s, the Fed has responded quickly and effectively to the several crises that have arisen, such as the stock-market crash of 1987, the Asian financial crises in 1997, the Russian bond default in 1998 that traumatized world bond markets and the 2001 recession in the United States.

The latter year was "a good example of the Federal Reserve operating in a constructive way on many fronts," he said.

The Fed's aggressive pace of interest-rate cuts helped limit the economic damage from the bursting of the stock-market bubble and falling business investment following an unsustainable surge during the late '90s boom.

Parry flatly rejects a complaint from some Fed critics that the central bank should have raised interest rates enough to have prevented the stock-market bubble from developing in the first place...

-- (late@90s.bubble), April 23, 2004. res=9903E7D8103DF937A35756C0A9629C8B63

May 4, 2004, Tuesday


As Household Debt Rises, New Risk in Higher Rates


...After a three-year period when the Federal Reserve cut interest rates to their lowest level since 1958, Americans have become far more willing to load up on debt and banks have become far more willing to let them.

Household debt climbed at twice the pace of household income from the beginning of 2000 through 2003, according to data at the Federal Reserve. Enticed by low interest rates, Americans took on $2.3 trillion in new mortgage debt during that period -- an increase of nearly 50 percent. Consumer credit, from zero-interest auto loans to the much more expensive debt on credit cards, climbed 33 percent, rising to $2 trillion in 2003 from $1.5 trillion in 2000.

Alan Greenspan, the Federal Reserve chairman, has repeatedly argued in recent months that rising household debt poses few problems. Fed officials note that the financial position of American households is, in some respects, stronger than ever. The value of household assets -- from resale prices of homes to the size of stock portfolios -- has increased even faster than debt.

Indeed, the collective net worth of American households is now higher than it was before the stock market bubble burst four years ago.

And thanks in part to lower interest rates, monthly debt payments consume a smaller share of monthly income today than in late 2001...

-- (rising@interest.rates), May 23, 2004. pid=10000087&sid=aK5Noxp8TF.Y&refer=top_world_news

Greenspan Says Fed Can't Tell Whether Housing Bubble Forming

Aug. 24 (Bloomberg) -- Federal Reserve policy makers can't accurately tell whether home values across the U.S. are overheating, Fed Chairman Alan Greenspan said in a written response to a lawmaker's questions about the potential formation of a housing bubble.

``House price increases have outstripped gains in income and rents in recent years,'' Greenspan said in a letter released today by Senator Richard Shelby, an Alabama Republican, after the Fed chairman testified before the panel July 20. While that ``raises the possibility that real estate prices, at least in some markets, could be out of alignment with the fundamentals,'' he added ``that conclusion cannot be reached with any confidence.''

``House prices are difficult to measure given the enormous heterogeneity of the U.S. housing stock,'' Greenspan said.

Greenspan said the global economic recovery ``has become both stronger and more sustainable'' in the past year, even though growth in Asia ``appears to have braked sharply in recent months, as policy measures muffled the boom in the Chinese economy.'' Economic recovery in Latin America and Canada ``appear to be on track.''

In Japan, the country's economy ``may finally be on its way to a self- sustaining recovery,'' Greenspan said. Growth in Japan and elsewhere in Asia faces ``significant risks'' from ``the possibility of a hard landing in China,'' he said.

The Fed chairman also said that the ``case has not been made'' for a need to specifically monitor hedge funds.

``Concerns about market manipulation, whether by hedge funds or others, can best be addressed by enhanced market surveillance,'' Greenspan said.

-- (recent@new.s), September 18, 2004. pid=10000086&sid=aqTYmY6tlvks&refer=latin_america

Global Growth to Slow in 2005 Amid Oil, Deficits (Update3)

Oct. 4 (Bloomberg) -- The fastest global economic growth in three decades will slow next year, complicating efforts by the Group of Seven industrial nations to pare budget deficits and unemployment.

Record oil prices that U.S. Treasury Secretary John Snow calls an ``economic headwind,'' rising interest rates, contracting budget deficits and the first drop in global stocks in six quarters prompted chief economists from the International Monetary Fund, Goldman Sachs Group Inc. and Brown Brothers Harriman & Co. to cut forecasts for 2005. Morgan Stanley says there is a 40 percent chance of a worldwide recession next year...

...Average U.S. payroll growth in the three months ended August was a third of the prior quarter, hurting consumer spending. Japan grew at its slowest pace in a year in the second quarter, French joblessness unexpectedly rose in August to 9.9 percent and German retail sales in the first eight months of the year dropped 1.3 percent compared with a year earlier.

``Deceleration has already started and a further slowdown is definitely in the cards,'' said Kathleen Stephansen, director of economic research at Credit Suisse First Boston in New York.

With prospects of a slowdown, the IMF said Saturday the U.S, Europe and others must step up efforts to narrow budget deficits and ensure money will be available to finance a growing elderly population.

``Given substantial -- and understandable -- pressures for additional social and infrastructure spending, this underscores the importance of other measures to improve public debt sustainability,'' said IMF Managing Director Rodrigo de Rato.

Both President George W. Bush and Democratic challenger Senator John Kerry of Massachusetts say they intend to cut the U.S. fiscal deficit in half within five years if elected next month. The U.S. deficit reached a record estimated $445 billion in the fiscal year that ended Sept. 30...

-- (growth@and.deficits), October 11, 2004.

U.S. Leading Indicators Fall for Fifth Straight Month (Update1)

Nov. 18 (Bloomberg) -- A barometer of future U.S. economic activity fell for a fifth month in October, the longest stretch of declines since 1995, signaling that the world's largest economy isn't likely to accelerate in coming months.

The 0.3 percent drop in the Conference Board's index of leading economic indicators matched a decline in September that was lower than first reported, the New York-based research group said. The index has been falling since June.

``The recent declines in the leading index have not been large enough, nor have the persisted for long enough, to signal an end to the current economic expansion,'' the Conference Board said in a statement.

Consumers' economic outlook slumped last month as oil prices reached a record, stock prices dropped and the presidential candidates attacked each other with renewed vigor in the weeks before the election. Energy prices have since retreated and an uncontested vote boosted stocks and confidence this month. The leading index is down 1.4 percent at an annual pace over the last six months, short of the amount that would signal recession.

The index ``is too gloomy, but it is a reminder that all is not yet OK,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a Valhalla, New York-based consulting firm. Some of the components that dragged down the index ``have stopped deteriorating or have rebounded,'' he said.

Economists projected a 0.1 percent decrease in the index, following a previously reported 0.1 percent drop in September, based on the median of 56 forecasts in a Bloomberg News survey. Forecasts ranged from a 0.2 percent drop to a 0.1 percent rise.

U.S. Treasury notes declined. The 4 1/4 percent note due in November 2014 dropped 1/8 to 100 27/32 at 10:03 a.m. in New York The yield rose more than 1 basis point to 4.14 percent.

Orders, Expectations

Seven of the 10 indicators the Conference Board uses to derive the index contributed to the fall.

Besides falling consumer expectations, a drop in the money supply, a smaller spread in the yield between the Treasury's 10- year note and the overnight bank lending rate, a drop in building permits, a shorter factory workweek, a drop in factory orders for capital goods and faster supplier deliveries that suggest it's easier for companies to meet demand, accounted for the drop.

``Expect no better than moderate growth for now,'' said Richard Berner, chief U.S. economist at Morgan Stanley in New York, before the report

The Federal Reserve is expected to report today that its index of manufacturing activity in the Philadelphia area declined to 23.1 this month from 28.5 in October, the median of 50 estimates in a Bloomberg News survey of economists.

Jobless Claims

Fewer applications for unemployment insurance benefits in October, increased factory orders for consumer goods and an improvement in stock prices, helped temper the decrease.

First-time employment claims dropped to 334,000 in the week ended Nov. 13, bringing the average for the month to 335,500, the Labor Department reported today. Claims averaged 341,000 a week in October. The Standard & Poor's 500 index has averaged 1163.3 so far this month, compared with an October average of 1118.10.

The fifth straight drop in the index is the longest string of declines since 1995, Conference Board data show.

Three consecutive decreases in the index were once thought to foreshadow recession, according to a rule of thumb that has now been discarded because it raised warning flags too often. Measuring the severity and breadth of the declines are important in making more precise forecasts about the direction of the economy, according to the Conference Board's Ken Goldstein.

A decline of at least 3.5 percent on an annualized basis over six months provides, in addition to changes in the Conference Board's coincident and lagging indicators, a more accurate signal, according to Goldstein.

Contraction Call

Using the six-month criterion, the index correctly called six of the seven contractions since it was introduced in 1959. The index only failed to call the 2001 contraction, which Commerce Department figures show was the mildest since World War II. By comparison, the index has fallen at least three months in a row 22 times since 1959.

``I'm upbeat about the economy in general and the fourth quarter in particular,'' said Ron Sargent, chief executive of Staples in an interview Nov. 16. ``If you look at some of the economic data it's very strong.''

Framingham, Massachusetts-based Staples, the world's top office-supplies retailer, said two days ago that third-quarter earnings rose 26 percent compared to the same period last year and sales increased 12 percent.

The economy created 337,000 jobs in October, the most since March, and non-auto retailers sold 0.9 percent more goods last month, beating economist's expectations, separate government reports showed earlier this month.

More here

-- Leading (indicators@fall.again), November 18, 2004.

U.S. Trade Gap Widened to Record $60.3 Bln in Nov. (Update4)

Jan. 12 (Bloomberg) -- The U.S. trade deficit unexpectedly grew to $60.3 billion in November, the widest ever, as demand for oil and consumer goods pushed imports to a record. Exports fell.

The trade gap increased 7.7 percent from the previous high of $56 billion in October, the Commerce Department said today in Washington. The imbalance with China accounted for more than a quarter of the total deficit.

``We need to get more growth in the global economy,'' Treasury Secretary John Snow said in an interview, saying that the deficit a sign of U.S. economic strength. ``As our trade partners grow faster, that will be good for our exports.''

The unprecedented U.S. budget and trade shortfalls threaten a further erosion in the dollar, which fell 4.6 percent last year against a basket of currencies. To keep financing these shortfalls, foreign investors may demand higher interest rates for U.S. assets that they buy. A cheaper dollar also threatens to aggravate inflation by making imports more expensive.

November's trade deficit may shave as much as 1 percentage point from fourth-quarter growth forecasts, said economists including Stephen Stanley of RBS Greenwich Capital Inc. in Greenwich, Connecticut, and Ian Morris of HSBC Securities USA Inc. in New York.

Others, including Joseph LaVorgna at Deutsche Bank Securities Inc. in New York, said any negative effect from trade may be overcome by increased spending.

Fed Policy Implications

Fed policy makers are likely to use the numbers to continue raising the benchmark interest rate because of what the report shows about demand in the U.S., economists said.

``From an economic perspective, the rapid widening of the trade gap is a sign that monetary policy remains far too accommodative,'' said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York. The policy making Federal Open Market Committee ``might worry'' about the impact on inflation.

``Unavoidable economic logic suggests that eventually this situation will prove unsustainable,'' Cathy Minehan, president of the Federal Reserve Bank of Boston, said in a speech today, citing the trade gap and the drain on national savings from the federal budget deficit.

The budget deficit narrowed in December to $3.4 billion from $17.6 billion a year earlier, the Treasury Department said today. A forecast in September from the Congressional Budget Office called for the gap to shrink to $348 billion this fiscal year, which ends Sept. 30, from a record $412.3 billion in 2004.

Fed officials said at their Dec. 14 meeting that strengthening demand among U.S. trading partners was ``unlikely,'' according to minutes published last week.

`Grand Canyon' of Deficits

The U.S. economy grew 4 percent in the third quarter from a year earlier, compared with 1.8 percent in the countries using the euro and 2.6 percent in Japan.

The $561.3 billion excess of imports over exports through November exceeds the record $496.5 billion for all of 2003.

``We now have the Grand Canyon of trade deficits, and there is no saying it will not widen further,'' Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said. ``The ever widening trade chasm has to put further pressure on the dollar.''

Economists expected the deficit to narrow to $54 billion for the month compared with a previously reported $55.5 billion in October, according to the median estimate of 70 forecasts in a Bloomberg News survey.

`No Sense' to Exports

A cheaper dollar is supposed to strengthen exports by making U.S. goods cheaper, and exports had climbed to a record in October. The subsequent drop caught economists by surprise.

``The November plunge makes no sense,'' Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said. He noted that exports in the first 11 months of the year were up more than 12 percent.

The euro traded at $1.3270 at 3:12 p.m. in New York, compared with $1.3107 yesterday. The yen traded at 102.36 per dollar, compared with 103.32. The deficit with the 15-country European Union widened. The deficit with Japan was the largest since October 2000.

Imports rose 1.3 percent for the month to $155.8 billion. Exports fell 2.3 percent, the first decline since June, to $95.6 billion. Exports were $97.8 billion in October.

Reduced shipments of civilian aircraft and oil-drilling equipment led the decline in exports...

-- (deficits@nd.debts), January 12, 2005.

UPDATE 3-Behavior of world bonds a "conundrum"-Greenspan

Wed Feb 16, 2005 05:46 PM ET

(Recasts with analyst comment, current interest rate yields)

By Andrea Hopkins and Mark Felsenthal

WASHINGTON, Feb 16 (Reuters) - In a stark warning to bond investors that the market may be overpriced, Federal Reserve Chairman Alan Greenspan said on Wednesday he was just as puzzled as everyone else about why long-term interest rates have remained low.

"For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum," Greenspan told the Senate Banking Committee.

The admission by Greenspan that there were no easy explanations for why long-term interest rates are so low in spite of rate increases by the central bank surprised observers, and analysts said the comments suggested that bond traders may be mispricing the market.

"It does appear that Mr. Greenspan thinks long rates should be higher than they currently are. And that is a warning to bond investors," said Joel Naroff, president of Naroff Economic Advisors.

Alan Ruskin, research director at 4CAST Ltd in New York, agreed.

"There is some hint that perhaps the bond market has got it wrong and yields shouldn't be this low. It is certainly bearish for the bond market," Ruskin said.

While traders expect the overnight federal funds rate target to be raised to 3 percent by midyear, 3-year Treasury notes (US3YT=RR: Quote, Profile, Research) are only yielding about 3.57 percent and 5-year notes (US5YT=RR: Quote, Profile, Research) are yielding 3.78 percent.

The Fed chief outlined several possible explanations for the dip in forward real interest rates since June -- including the low inflation enjoyed in many countries as a result of increased capacity. That has boosted expectations for continued low price pressures and lower inflation risk premiums.

"But none of this is new, and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization," Greenspan said.

He said the view that investors were guessing that oil prices would hold back growth did not appear to "mesh seamlessly" with rising stock prices and narrowing credit spreads.


Greenspan said other analysts pointed to an increased demand for credit by U.S. businesses and the willingness of lenders to provide financing -- notably foreign central banks, who have bought U.S. Treasuries irrespective of market fundamentals.

Greenspan also said mortgage investors might be buying longer-term securities to offset shorter duration among mortgage-backed securities, possibly contributing to downward pressure on long yields.

He warned U.S. policy-makers should be careful in attributing the interest rate declines solely to technical factors in the United States, because there has been a similar worldwide narrowing in yields and risk spreads.

"Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience," Greenspan said.

Regardless of the reason, bonds have tended to rally more often than not despite widespread predictions for significant spikes in yield, and Greenspan may have been trying to reverse the trend with his words of caution.

Analysts said he could also be warning markets that the Fed is concerned it has lost control of long rates and is prepared to raise rates more quickly than expected.

"This concern about what is happening at the longer end of the curve could ... be because the Fed believes that its monetary tightening is being diluted -- which may indicate that they are considering the prospect of potentially having to tighten monetary policy more aggressively," said James Knightley, economist at ING in London.

Usually, when the central bank tightens policy by raising official borrowing costs, the yield curve flattens but long rates go up as well -- but that is not happening.

"It has got to be something they are concerned about. They don't want to have a disturbance some time in the future if we get back to the usual pattern. They would rather it happen slowly and steadily, rather than all at once," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets.

Part of the resilience in the long-end has been due to popular curve-flattening trades, bets that longer-dated securities would perform better than their shorter-dated counterparts as official interest rates climb.

The spread between 10- and two-year notes narrowed dramatically in recent months, and at its current level of 76 basis points, was still within reach of a 3-1/2-year low touched last week. (Additional reporting by Pedro Nicolaci da Costa in New York)

Reuters 2005. All Rights Reserved.

-- (Life@in.2005), February 16, 2005.

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