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Can we believe Greenspan’s optimism?

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by Peter Switzer

Wall Street just won't give us a break with another negative day as the Dow dropped 0.42 per cent, with disappointing economic news worrying investors. However, US economist Alan Greenspan has given us a cause for a bit of calm telling us that soft patches in an economic recovery are par for the course.

Two observations

And he made two other interesting observations in an interview on CNBC. First, while economic events usually lead stock markets, he thinks there could be a bit of a reverse situation going on here at the moment.

Second, most of this negative market stuff is coming from Europe’s woes more than a belief that there’s a serious economic problem, such as a pending double dip recession likely for the US.

It was interesting to see that the ‘fear index’, while at elevated levels, did fall overnight.

Disappointing data

The economic data the Yanks got last night was not inspiring.

The very important ISM report for manufacturing fell from 59.7 in May to 56.2 in June. A fall was expected but only a 0.7 drop was on economists’ crystal ball. Interestingly, history says this ISM measure does not stay in the high 50s region for sustained periods, so this reading might not necessarily mean that American manufacturing is about to fall off a cliff.

The US dollar is now higher. The stock market is spookier and the economy is facing more headwinds. These factors could explain a softening of manufacturing.

In other bad news, initial claims for unemployment benefits went up 13,000 last week to 472,000 and the experts had tipped a fall!

The Greenspan view

Back to Greenspan, and the former US central bank boss who has been blamed for a lot of the sub-prime-mess thinks this data showing slowing is to be expected.

“What we’re looking at is an invisible wall, which we’ve run into here, which, essentially, as far as I can see, is a typical pause that occurs in an economic recovery,” he said. “Ordinarily we’re saying that the stock market is driven by economic events, I think it’s more in the reverse.”

He says fear is hurting employers’ willingness to hire workers and those in work are putting in more hours.

Greenspan concluded that the average working week has been going up which means that bosses are more intensively using what workers they have before hiring again.

He thinks the unemployment rate will go lower when the markets head up.

And for those who might not rate Greenspan, I would say until his most recent mistakes he was seen as a doyen of central bankers. He has studied the US economy his whole working life and his views still have some value. If he was terribly negative on the future for the US economy, it would rattle my cautious optimism that we will get through this soft, or more correctly, rough patch.

Jobs watch

The next big economic statistic is tonight’s jobs report and while it will be a negative number, because the temporary Census workers who have now finished their work will enter the jobless pool, experts will look at what happened to private sector employment.

A surprise on the high side would be a real circuit breaker but my gut feeling is that this reading won’t be the ripper we would love to see.

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, July 02, 2010