Greenspan pilots US towards a soft landing

SUNDAY TIMES (London)

March 19, 2000

Life was simpler for economy-watchers in the good old days. All they had to do was guess what Alan Greenspan, the Federal Reserve chairman, might do to interest rates and look to Warren Buffett for guidance as to which shares to buy. Things are more complicated now.

Start with Buffett, the quintessential "value investor". His stock-picking of late has been so poor that he has given himself a "D" grade as an investor. It seems that what he took to be blue chips have turned out to be old-economy companies, to use the jargon of the day. So Buffett no longer is a star by which investors can steer on their way to steady growth.

Greenspan still has to be watched, but the fun of guessing what he might do is gone, at least for now.

The Fed chairman has taken to signalling his moves in advance, so that much of the guesswork is gone. Rates are on the way up - Greenspan has made that clear at every opportunity.

The meeting that needs watching, then, is not the gathering of the Fed's monetary policymakers, but that of the Opec oil cartel, which will decide just how much oil to dole out to the world's industrial nations. After engineering a production cut that has trebled oil prices, Opec is prepared to open the taps.

But if preliminary reports prove right, it will not open them enough to bring prices down very much. With stocks at record-low levels, it would take a production increase of about 2m barrels per day to get enough oil into the system to lower prices to, say, $ 20-$ 23. Opec is most likely to allow output to rise by only some 1.2m-1.5m barrels per day.

The cartel's members want to satisfy themselves that the increased supply - coming at a time when demand usually slows as the heating season ends - does not lower prices to anything approximating the level that would prevail in a competitive market.

America was taking the oil-price spurt in its stride, for reasons so well set forth by my colleague, David Smith, in these pages last week. Then two things happened. Procter & Gamble triggered a stock-market sell-off by reporting surprisingly poor earnings and blaming that performance in part on rising raw-material - mostly oil - prices.

And America's politicians decided that soaring petrol prices would put energy policy on the front burner come the summer driving season. It seems that Al Gore, the Democrats' candidate to succeed Bill Clinton, cast the tying vote in the Senate (vice-presidents, whose main job John McCain describes as inquiring daily into the president's health, also get to vote if the Senate is tied) that put over a rise of almost 5 cents in petrol taxes.

Republicans want that increase repealed, or at least are saying they do so as to embarrass Gore.

All of the hoopla coming from Washington has added to the attention being paid to oil prices, despite the fact that oil is far less important in the American economy than it has ever been. America's manufacturers now say that they expect higher oil prices to combine with higher interest rates to produce a slowdown in the rate of economic growth.

A survey by the National Association of Manufacturers of 2,500 of its 14,000 small and medium-sized members shows that many expect their profits to shrink because they will be unable to pass on higher energy costs and higher interest rates.

But before jumping to the conclusion that the economy will tip into recession, note that 44% of the association's members report that they plan to increase capital spending by more than 5% this year. And about half are predicting that the economy will grow at a 2.5% rate this year - slower than last year's 4.1%, but hardly something about which to worry. This comes from a group with a history of rather pessimistic forecasts.

Indeed, the signs of a soft landing are beginning to proliferate. The cooling effect of interest rates that are now at their highest level in inflation-adjusted terms for almost two decades is certain to be felt in coming months.

So, too, is the effect of the softening of share prices, which has now spread from old-economy stocks to many of the internet companies that were the darlings of investors only a few months ago. With shares now accounting for a record one-third of household wealth in America, uncertainty in the stock markets should produce just a bit of caution on the part of consumers.

Add to that the fact that consumers may have reached the limit of their ability to take on debt. Americans are now spending about 15 cents of every dollar they take home to pay the interest on their mortgages and their credit-card balances.

When the Fed raises rates, that burden will increase, leaving consumers with less money to support the amount of spending that has helped to propel the economic growth rate to a level that the Fed, at least, feels is unsustainable.

But a slowdown should not be confused with a recession. All signs point to healthy growth for the rest of the year.

Stocks are at record-low levels compared with sales, meaning that factories will have to continue churning out goods to restock shelves and meet consumer demand, even if the latter slows a bit from the torrid 5%-6% rate at which it seems to be growing so far this year.

Capital spending, too, is likely to recover from its end-of-1999 slump as labour-short businesses continue to invest in productivity - enhancing equipment of the sort that contributed to a 6.4% annual rate of increase in non-farm productivity in the last quarter of 1999.

All in all, the probable outcomes this year rank as follows. Recession: highly unlikely. Continuation of the 6+% growth rate of the last quarter of 1999: possible but not probable. Growth at between 4% and 5%: the most likely scenario - not a bad prospect.