My, Father-In-Law, a retired U.S. Treasury Executive, sends me interesting bits and pieces from time to time about the economy. Today I opened my mail and found a statement made last month from Federal Reserve Chairman Alan Greenspan to the U.S. Senate Committee on the Budget. He discusses his take on the state of the U.S. economy.
I read this thing and came to the conclusion that no matter where you stand politically, Mr. Greenspan is undoubtedly a bright man. His statement really seemed to sum up the workings of our economy in only a few hundred words. Let me do my best and summarize what he said.
The "forces" that have been restraining economic activity over the past year has have been diminishing. This points to a stronger economy growth in the future.
One of the key indicators of an economic rebound is inventory levels. Corporate inventories are at very low levels because the rate of production is well below the rate of sales. Diminishing inventories will induce a rise in industrial production, which will ultimately lead to an increase in household income and spending.
Low interest rates and a strong housing market have been important factors in keeping household spending at strong levels. Thanks to low interest rates and housing appreciation, more people are purchasing homes and existing homeowners are cashing in on the newfound equity. The cash tapped from home equity and lower mortgage payments then gets passed on in the economy at the consumer level.
Auto sales were very strong in the 3rd quarter of 2001. Thanks to short-term interest rates at unprecedented low levels, financing incentives attracted auto purchasers at a remarkable level.
Drops in energy prices have provided some support to income and consumer spending. However, energy prices would have to decline further if it is going to make a significant impact on economic growth. The predictability of energy prices is very difficult.
The status of the labor market has perhaps the biggest influence on consumer spending. The unemployment rate rose last year and was exacerbated by the events of September 11, but unemployment claims in the last two months have decreased, suggesting that the unemployment rate may not continue to rise.
Capital spending by corporations also slowed in 2001. The events of September 11 again exacerbated this problem as did falling corporate profits and a drop in stock prices. As a result, corporate growth slowed. As one would expect, this had a negative affect on the labor market and consumer spending.
Inflation remains low and manageable. Economic globalization and deregulation have enhanced competition, which has controlled prices on the retail level. In fact, companies have not been able to pass on any cost increases to the consumer as a result of world competition. Without the ability to raise prices, corporations have had to trim the workforce, causing a higher unemployment rate.
New technologies available to the corporate world will increase efficiency. This will enable corporations in increase their profit margins without raising prices or trimming the workforce.
That's about it, folks - or at least what I got out of it. Perhaps it's not terribly logical. We still have strong consumer demand and low interest rates. Yet we have a rising unemployment level, which suggests an over slowing in economic growth.
Mr. Greenspan's answer is that technological advances will increase profit margins without raising prices. Increased consumer and corporate spending will then follow and our recession will be over.
Who knows? I usually write a mortgage column. If we come back to earth I can tell you that a $200,000 loan at eight percent will cost you $1,468 per month. The same loan, at 6.75 percent will cost you $1,297 per month. That's a difference of $171 per month, or $2,052 per year, or $61,560 over 30 years. It adds up. These economic theories and predictions are fine and dandy but all I know is that if the cost to buy your house is $171 cheaper per month, that may be the deciding factor for a renter to become a homeowner. Or if an existing homeowner can trim his mortgage payment by $171 per month, that money will probably go right back into the economy.
Published: February 6, 2002
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 , the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually. |
