By Steven K. Beckner
Market News International - Federal Reserve Chairman Alan Greenspan cited to Congress a recent survey of purchasing managers which he said "suggests that the wave of new on-line business-to-business activities is far from cresting." And he said the projections of equity analysts indicate that corporate managers "appear to remain remarkably sanguine about the potential for innovations to continue to enhance productivity and profits."
"According to one prominent survey, the three- to five-year average earnings projections of more than a thousand analysts, though exhibiting some signs of diminishing in recent months, have generally held firm at a very high level," Greenspan noted. "Such expectations, should they persist, bode well for continued strength in capital accumulation and sustained elevated growth of structural productivity over the longer term."
Greenspan also devoted considerable time to the double-edged nature of the technological and procedural innovations that have affected business responses to inventory-sales ratios. What may have been negative in the recent past, may be positive in months to come, he suggested.
As other policymakers have commented recently, the same technology that caused companies to cut back production in response to rising inventory levels more quickly than in the past will lead to a more rapid ramping up of production once inventories are adjusted.
"The same forces that have been boosting growth in structural productivity seem also to have accelerated the process of cyclical adjustment," Greenspan observed. "Extraordinary improvements in business-to- business communication have held unit costs in check, in part by greatly speeding up the flow of information. New technologies for supply-chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage -- virtually in real time -- and can cut production promptly in response to the developing signs of unintended inventory building."
Although "surprises can still occur and (the inventory adjustment) process is still evolving," Greenspan said "much progress is evident" in what he called the "round of inventory rebalancing." A couple of decades ago, Greenspan said there would have been "a more stretched-out process of production adjustments," but he indicated he does not expect that this time.
To begin with, Greenspan also said, "inventory-sales ratios rose only moderately." It was just that, "relative to the levels of these ratios implied by their downtrend over the past decade, the emerging imbalances appeared considerably larger. Reflecting these growing imbalances, manufacturing purchasing managers reported last month that inventories in the hands of their customers had risen to excessively high levels."
Not only are firms adjusting faster than in the past, but "firms appear to be acting in far closer alignment with one another than in decades past," Greenspan commented. "The result is not only a faster adjustment, but one that is potentially more synchronized, compressing changes into an even shorter time frame."
The biggest problem, Greenspan suggested, is that human nature has not changed as fast as technology. People are still apt to be "risk averse," to suffer a faltering of confidence and, therefore, to retrench in their spending plans, he said. And he said "this unpredictable rending of confidence is one reason that recessions are so difficult to forecast... ."
But here too, Greenspan saw a silver lining. "Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth," he said. "And as I pointed out earlier, expected earnings growth over the longer-run continues to be elevated."
"If the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited," Greenspan continued. "Prospects for high productivity growth should, with time, bolster both consumption and investment demand."
"Before long in this scenario, excess inventories would be run off to desired levels," he added..
There was also room, at least, for potential optimism in Greenspan's comments on energy prices. Greenspan placed heavy blame on the energy price shock for depressing demand, but as and when energy prices come back down, demand should rebound, he said.
"The recent decline in energy prices and further declines anticipated by futures markets, should they occur, would tend to boost purchasing power and be an important factor supporting a recovery in demand growth over coming quarters," Greenspan said.
Also significantly, while Greenspan announced that the FOMC had reduced its central tendency forecast for real GDP growth this year, it reduced it relatively modestly from a range of 3.25% to 3.75% tentatively set last July to 2-2.5%. Unemployment will rise, but only to about 4.5% -- still far below what was once thought (and what many still think) is the "natural" or non-accelerating inflation rate of unemployment.
Greenspan clearly remains ready to reduce rates further, depending on incoming economic and financial data -- particularly since, as he also observed, low inflation has permitted the Fed to be more aggressive than it otherwise could have been. But his testimony suggested that the days of intermeeting rate cuts and 50 basis point reductions may be over.