IN GREENSPAN WE TRUST
Finally, after six rate increases over the last twelve months amounting to 1 3/4%, Federal Reserve Board Chairman Alan Greenspan and his colleagues decided to take a pass at the end of last month, and leave interest rates unchanged. That's the way most Wall Street economists thought it would go, so it wasn't much of a surprise to the market. The economy is, in fact, starting to show signs of slowing. Housing starts are down a bit, auto sales are down a bit more, and the consumer clearly has pulled in his horns to some extent. The stock market has been having a tough time, and these things amount to the beginning of the slowing that Mr. Greenspan thinks the economy needs.
Despite all the rhetoric, I don't think Mr. Greenspan is anti-prosperity or anti-good times. It is the Federal Reserve's job to "lean against the wind" when times are tough. They are supposed to prime the pump, and that's exactly what they did at both the third quarter of 1998, because of the International Financial Crisis, and the second half of last year due to Y2K fears.
I honestly think that the Fed is probably done with the interest rate increase cycle. They have another meeting coming up on August 22nd; I suspect unless there are some nasty inflationary numbers between now and then, that will be it for increases this year. They do have another meeting on October 3rd, but that will be too close, presumably, to the November election, remembering that this is a time during which the Fed always wants to appear neutral.
What is conveniently forgotten in all this is that the Fed does have two more meetings after the November election. Nobody seems to talk about that. There is a meeting on November 15th, and again on December 19th. Anybody who says the Fed won't act then because they theoretically do not want to take Thanksgiving or Christmas away from the people with a nasty rate increase, is just kidding themselves. At the bottom line you can expect the Fed to do what it thinks it has to do. Given his past track record, how can anyone question Mr. Greenspan's judgement? You simply have to give him the benefit of the doubt, and figure he is probably right again. As usual, only time will tell.
Of course, one of the things that has helped control our economy has been the expansion of technology, which has then increased productivity. Recently, Robert Shapiro, Under Secretary of Commerce for Economic Affairs, said, "Growth and information technology investment is continuing to boost productivity and is, in turn, driving inflation down." These and other conclusions came from the Commerce Department's Third Annual Report on so-called "digital commerce."
In assessing our economy, Shapiro said that Gross Domestic Product remains strong, core inflation rates are modest, and productivity growth is very strong. He noted that emerging revelations about the impact of information technology on productivity growth, is one of the reasons many economists are revising upward their former 2½ % threshold as the maximum sustainable non-inflationary growth rate our economy can support. In fact, now many economists feel that 4% is a more realistic number. Shapiro said, "Investment and information technology not only isn't abating, in fact, there is every evidence that it is accelerating. This has helped productivity strengthen as the business expansion lengthens." Shaprio went on to say that about two-thirds of the growth in recent business investment comes from adding information technology. The information technology component now accounts for 8% of the overall economy, and it contributed to 32% of last year's growth. Shapiro stated that most of the disinflationary impact from information technology investment has occurred since 1996, and adding that "Productivity growth from 1995 through 1999 averaged 2.8% annually. That is near double the rate of any period over the last 30 years."
And that continues to be the key, dear reader. Productivity, or output-per-worker-hour, as we all learned in Econ. 101, is the key to a healthy economy. The good news coming out of this Commerce Department Report is that productivity is growing, not declining, it is becoming more important in our economy, not less important, and that becomes something of an "insurance policy" as the Fed attempts to continue to keep this longest economic expansion in the history of our county alive and well.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)