Replies to post #24171 on Zeev's Turnips Patch-No Politics (ZEEV)

[profit_guy]

mlsoft, that is a well-crafted post...i agree

pg

[epsteinbd]

Interesting and convincing.

[there]

I agree

[Zeev Hed]

May I suggest you look at how much the national debt has increased since April (about $200 B), that fiscal stimulus (2% of GDP) will find its way into the economy providing the post second dip rise. I think that what you are describing will come in (see #msg-491054) but later, and the bottom of the next bear market (the second bear leg) may not be in till well into 2005.

Zeev

[sarai]

msloft, I agree with your excellent analysis. I thought this might interest you if you hadn't already seen it.

Economic Growth Slowed Recently -- Fed

September 11, 2002 02:42 PM ET

By Tim Ahmann

WASHINGTON (Reuters) - U.S. economic growth slowed in recent weeks as strength in housing and autos was offset by weakness elsewhere, the Federal Reserve said on Wednesday in a report underscoring the patchy nature of the recovery.

"Most districts indicated slow and uneven economic growth, with mixed or scattered experiences across sectors of the economy," the Fed said in its so-called beige book, an anecdotal snapshot of economic conditions across the nation.

The report found an uneven performance among retailers in late July and August, and "sluggish" manufacturing activity.

In addition, most of the 12 regional Fed bank districts said few or no jobs were created, although three noted increased demand for temporary workers.

"It captured the economic pessimism that gave rise to talk of a potential double-dip (recession) this summer," said Lou Crandall, chief economist at Wrightson Associates in New York.

He said many economists had expected activity to pick up after a July lull, but added that does not appear to be the case.

"It came away with a gloomier assessment," he said of the Fed's report.

The beige book, a compilation of material from each Fed district, will be used by the central bank's policymakers when they gather on Sept. 24 to discuss interest rates.

At that meeting, the Fed, which slashed borrowing costs 11 times last year to combat economic weakness, is widely expected to leave the benchmark overnight lending rate at a 40-year low of 1.75 percent, which it reached last December.

AUTOS, HOUSING LEND SUPPORT

The report said auto sales rose above year-ago levels "mostly due to aggressive financing and rebate incentives," but that sales at other retailers were mixed.

Three districts found warm weather curbed apparel sales, while three said back-to-school sales were strong and a fourth said they were disappointing.

"Overall, retailers are cautiously optimistic about the fall, expecting sales to be flat or slightly up from their 2001 levels," the Fed said.

It also said manufacturers were still struggling.

"On the whole, manufacturing activity was sluggish, with a good deal of variation by industry and region," the beige book said, noting signs of strength in autos and steel but weakness among the high-tech and building materials industries.

The report said inflation was well-contained, with both consumer prices and costs for items businesses need for production unchanged or up only slightly.

But businesses were not without worries on the cost front.

"Despite few signs of pressures on wages, there was widespread concern about the effect that rising health care costs might have on labor costs," the report said.

The report said home-building and buying were strong, but commercial real estate markets were weak. While mortgage and refinancing demand was robust, business lending was soft.

The picture painted by the beige book fits in with other recent economic reports showing strong activity in some areas -- notably housing and autos -- but weakness elsewhere.

SLEUTHING

Markets largely shrugged off the report, taking the view that it offered few new clues on the direction of Fed policy.

Most economists think the next move on interest rates will be up -- although perhaps not until well into next year -- but some believe the central bank could cut rates again to boost a sluggish economy struggling under the weight of a massive stock-market decline.

However, a number of Fed officials have recently suggested they see little need for further rate cuts.

Indeed, policymakers, in announcing their decision to hold borrowing costs steady after their last meeting on Aug. 13, said the current low level of rates should prove sufficient to underpin growth, even as they changed their assessment of economic risks to one in which the downside predominates.

Fed Chairman Alan Greenspan may offer some further clues on the direction of interest rates on Thursday when he testifies on the economy before the House of Representatives Budget Committee. His testimony is slated for 10 a.m. (1400 GMT).

[sarai]

An older but insightful article from one who is no fan of Greenspan. A worthwhile read from an excellent site:

BURSTING GREENSPAN'S BUBBLE


Alan Greenspan demonstrated his awesome powers once again on Tuesday, sending the stock
markets skyward by simply admitting that the economy was slowing. The Federal Reserve
Chairman's speech was widely interpreted as an indication that the Fed could lower interest rates next
year. The recently battered Nasdaq jumped more than 10 percent, an all-time record increase.

The signs of an economic slowdown are everywhere: third quarter GDP growth dropped to 2.4%, from 5% in the previous quarter. Auto sales, housing starts, and retail sales are also lagging. Vice Presidential candidate Dick Cheney declared this week that "we may be on the front edge of a recession."

Cheney's comment was an unusual break with protocol-- presidents and their spokespersons don't
normally talk up the possibility of a recession, because the talk itself is not healthy for the economy.
He was trying to link the downturn, if it happens, with the Clinton-Gore administration, while it is still early enough to do so.

But the person who really ought to take the lion's share of the blame for a "hard landing" is Alan
Greenspan, and yet he retains his image of infallibility. Fearing "tight labor markets"-- something that most people celebrate because it means more job opportunities and a chance at a pay increase-- the Fed has raised interest rates 6 times in the last year and a half.

These rate increases, which brought the short-term Federal Funds rate to its highest level in nine
years, have just started to have their intended effect: slowing consumer and business spending. In the
coming months this will probably be seen as a mistake, and one that will not be so easy to correct.

The other major source of the slowdown has been the decline in the stock market, which also causes both businesses and wealthier consumers to cut spending. The Nasdaq dropped 48 percent and the Dow about 10 percent from their peaks this year, and the Greenspan-led rally isn't going to make up for that.

While the Fed did not create the stock market bubble, the way Mr. Greenspan has handled it has
exposed our economy to great risk. He was acutely aware that stocks were overpriced four years ago,
when he made his famous speech about "irrational exuberance." The Dow, already overvalued at 6300,
responded with a 2 percent drop. Although the market quickly recovered and began its ascent to the
stratosphere, Greenspan reassessed his strategy. This bubble may be crazy, he thought, but I'm not going to take the blame for letting the air out of it.

Over the next few years, the Dow would grow by 80 percent and the Nasdaq nearly quadruple. But Greenspan would no longer raise the idea that it was overvalued, and he actually retreated from his
previous remarks. This was a serious mistake. The Fed could have continued to talk the market down,
and even used its control over margin requirements--for borrowing in order to buy stock-- to dampen the speculative excesses.

Instead, the Fed began a series of interest rate hikes in June of 1999. In other words, rather than
target the stock market, where the problem resided, the Fed trained its weapons on the whole economy.
This is certainly unfair-- it punishes everyone from home buyers to workers (when unemployment rises,
as it almost certainly will); and the vast majority of Americans have gotten little or nothing out of the bull
market in stocks. It also had the effect of setting up a one-two punch-- the shrinking stock bubble and
interest rate effects hitting the economy at the same time-- that could very well end in a knock-out for the economy.

Had the Fed used its power and influence -- the kind that we witnessed on Tuesday-- to squeeze
the stock market rather than the economy, we would not be facing such a high risk of recession.

Unfortunately, stocks are still-- on average-- enormously overvalued relative to any conceivable
earnings that the underlying companies might produce. The country is also carrying a record trade
deficit and an overvalued dollar that could plummet at any time. A falling dollar would increase inflation by increasing the price of imports. The Fed, which elevates the fight against inflation above all other
concerns, would be loathe to lower interest rates in the face of a falling dollar-- even if that's what were
sorely needed to jump-start the economy.

The Fed actually brought on the last (1990-91) recession by raising interest rates to 10 percent in
1989. Although Mr. Greenspan began lowering them as the economy slowed, it turned out to be too little and too late.

How quickly we forget.

http://www.cepr.net/columns/weisbrot/bursting_greenspan_bubble.htm

Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, DC.


Center for Economic and Policy Research, 1015 18th St., NW, Suite 200, Washington, DC 20036
Phone: [phone], Fax: [phone], E-mail: [e-mail]. Home: www.cepr.net