Why Greenspan Won't Slow Down Now

  • Share
  • Read Later

Are the rate cuts working yet? Greenspan

The good news is business inventories — the corporate hangover from the great bubble-burst of late '00 — are still on the decline, dropping 0.2 percent in March after a similar drop in February. The bad news is that was March, and this is May, and another kind of overhang reduction may still be underway: layoffs.

And that's one hangover Alan Greenspan is still very worried about.

As the Fed heads into its May confab Tuesday, the economy's prospects for dodging a recession are actually looking pretty good. On Friday, encouraging reports for April on retail sales (up), consumer sentiment (up) and wholesale inflation (pretty tame) put a dent in the unanimous expectation that the Fed heads would chop another 50 basis points, or a half-point, off the short-term interest rate that is the Fed's raison d'etre. Theoretically, Fed cuts take 6-18 months to work their magic in the economy (though the stock market "wealth effect" has in recent years been credited with speeding that up). If consumers, flush with mortgage-refinancing cash and a hard-earned cynicism about the market's ups and downs, are going to carry us through, does Greenspan really want to plant an inflationary time bomb that could go off next winter, just when things are likeliest to pick up on their own?

Our guess is yes. He'll deal with the economy first and the time bomb later.

As it stands right now, we appear to be past the bust in the stock market — both the Dow and the NASDAQ are comfortably off their mid-March lows, and barring a new round of dire economic news, few market-watchers expect another big dip anytime soon. If that's the case, it's because companies have been furiously cutting costs and lowering production since winter in a struggle to return to some semblance of profitability, and investors, while not exactly rushing in — they've learned some lessons from the past year — have handed out some points for effort.

But as hinted at by the first quarter's negative productivity numbers — the first drop in that vaunted measure in six years — there are still plenty of costs to cut, and those are labor costs. And as common as layoff announcements are these days, plenty of fingered workers' salaries — or severance packages — are still on the books. Translation: There's likely worse to come.

Worrying about consumers' spirits

Of course, those workers — known as consumers when they punch out and go home — are the ones seeing this economy through. Consumer spending accounts for two-thirds of the U.S. economy — of the startlingly robust 2 percent first-quarter growth number, 90 percent came from consumers, with home and car sales doing most of the work. And a lot of that irrepressibility can be ascribed to the fact that unemployment in that same first quarter ticked up only slightly, to 4.5 percent. That's still not a number you get in a recession.

It's also still on the rise. In real time — as opposed to economic-report time — we're now halfway though the second quarter, and weekly unemployment claims have been headed up all this time — and the four-week rolling average, over 400,000 at last count, is definitely knock-knock-knocking on recession's door. In this era of market madness, consumers may well have wearily learned to separate their portfolios from their household budgets. But no economist is yet suggesting that they'll continue to spend without a paycheck.

When the unemployment figures for the second quarter — otherwise known as the present — come out this summer, we're likely to find we've been living in a world of 4.7, 4.8, even 5 percent unemployment. And that'll be the kind of number that could finally break the mighty consumers' spirits.

And so everybody's sort of waiting with bated breath. Companies, especially the kind that sell to other companies, are paring costs (and payrolls) and waiting for business to pick back up. Investors, while starting to trickle back in on what they hope will be the new ground floor, are mostly waiting for, well, for business to pick back up. And everyone's waiting for the Fed's four (going on five) rate cuts to work their magic, both on Wall Street and Main Street alike.

If there's a consensus on anything, it's that Greenspan's aggressive easing will work — eventually. The Fed always wins in the end, and because of that there's cause for the Fed to worry that another 50-point cut Tuesday will be someday determined to have been overkill — just like the 50-point hike that Greenspan laid on us a year ago this month. And with Friday's news so heartening, there's a possibility Greenspan will send a vote of economic confidence with a 25-point, everything's-gonna-be-alright cut. (Even though Wall Street would immediately run screaming from the room.)

Trying to keep wallets open

The good news, however, is far from solid. The turnaround that was once popularly scheduled for fall has now been pushed back to winter. And because of the generally gun-shy, spooked-herd state of U.S. business these days, the turnaround may not get going until the turnaround gets going (you know what we mean).

It certainly won't happen without the consumers. Greenspan can't do anything about creeping unemployment, and as it does some wallets — those belonging to the actual unemployed — will inevitably close. But he can keep up the spirits of those who are still working — and facing a summer of stifling energy prices — and send them the message that the Fed is trying, trying its hardest, to avert a recession, and the Fed always wins in the end.

Since 1928, stocks in the S&P 500 have been up an average of 15 percent 6 months after the Fed's first rate cut, and another 19 percent a year later. The Fed always wins in the end. But the next couple of months — and a large portion of Greenspan's legacy — are still up for grabs.

Think he's worrying about inflation?