Warlady
02-15-2003, 11:18 AM
Greenspan Fiddles and the French Dance
by John Mauldin
February 14, 2003
Greenspan Fiddles as the Economy Burns
The Union of European Socialist Republics
for The Want of A Nail
In for a Dime, In for a Dollar
Betting the Whole French Ranch
Sometimes it is the small things that lead to big changes. Today we briefly look at one paragraph in Greenspan's latest speech, then move on to Europe and Iraq. I want to suggest some small things that could lead to changes in global politics and the world economy just as significant as the fall of the Berlin Wall. My theme for 2003 was Surprise and Transition." I think we are getting ready for our first true surprise. Again, there is a lot to go over, so let's get started.
Greenspan Fiddles as the Economy Burns
First, carefully read the following quote from Alan Greenspan's recent Senate testimony (my bold for emphasis):
"The intensification of geopolitical risks makes discerning the economic path ahead especially difficult. If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation -- or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory.... If instead, contrary to our expectations, we find that, despite the removal of the Iraq-related uncertainties, constraints to expansion remain, various initiatives for conventional monetary and fiscal stimulus will doubtless move higher on the policy agenda."
Throughout his testimony, Greenspan blamed the current "soft spot" on the uncertainty surrounding Iraq. He (along with nearly every mainstream economist) still predicts an economic upturn this year.
The economy grew at 0.7% in the 4th quarter, but as Andrew Kashdan of Apogee points out, that number is misleading. Government spending contributed 0.86% of the growth, or more than the actual growth. Even that may be misleading.
The real problem he reveals is the "strength" in nonresidential fixed investment is tenuous, at best. Much of the transportation increase is composed of planes which were contracted for years ago. This part of the economy is not going to stay strong. Light truck sales were strong, but because of significant incentives. "In sum, the strength in fourth quarter business equipment spending appears to be a one-off event."
He goes on: "How about technology, then -- is the boom back? Well, we're not partying like it's 1999 just yet. If we look at the subcategory that includes "information processing equipment and software," we see that, in real terms, IT spending increased at an annualized rate of 3.95%. This is a volatile number, but even so the growth is significantly slower than it's been the last few quarters (e.g., the annualized rate of growth was nearly 13% in Q3). On a nominal basis [actual dollars spent], the slowdown is even more severe -- fourth-quarter growth was only 0.9%.
"How to explain the discrepancy? Prices in the equipment and software category (as well as in the technology subcategory) have been declining, on average, which would make real sales increase slightly even without a rise in nominal sales. But the rest of the increase, we must presume, is due to tinkering to account for quality improvements, i.e., so-called hedonic price adjustments. The result: a nominal increase of $407 billion in equipment and software spending is magically transformed into a $581 billion increase (again, these numbers are annualized). The $174 billion difference is rather significant when overall nonresidential fixed investment increased by a mere $4.5 billion. (We have not yet figured out how to adjust our personal incomes for quality enhancements, but we've got our best people working on it.)"
click to read the rest (http://www.investorsinsight.com/print_preview.asp?id=jm021403)
by John Mauldin
February 14, 2003
Greenspan Fiddles as the Economy Burns
The Union of European Socialist Republics
for The Want of A Nail
In for a Dime, In for a Dollar
Betting the Whole French Ranch
Sometimes it is the small things that lead to big changes. Today we briefly look at one paragraph in Greenspan's latest speech, then move on to Europe and Iraq. I want to suggest some small things that could lead to changes in global politics and the world economy just as significant as the fall of the Berlin Wall. My theme for 2003 was Surprise and Transition." I think we are getting ready for our first true surprise. Again, there is a lot to go over, so let's get started.
Greenspan Fiddles as the Economy Burns
First, carefully read the following quote from Alan Greenspan's recent Senate testimony (my bold for emphasis):
"The intensification of geopolitical risks makes discerning the economic path ahead especially difficult. If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation -- or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory.... If instead, contrary to our expectations, we find that, despite the removal of the Iraq-related uncertainties, constraints to expansion remain, various initiatives for conventional monetary and fiscal stimulus will doubtless move higher on the policy agenda."
Throughout his testimony, Greenspan blamed the current "soft spot" on the uncertainty surrounding Iraq. He (along with nearly every mainstream economist) still predicts an economic upturn this year.
The economy grew at 0.7% in the 4th quarter, but as Andrew Kashdan of Apogee points out, that number is misleading. Government spending contributed 0.86% of the growth, or more than the actual growth. Even that may be misleading.
The real problem he reveals is the "strength" in nonresidential fixed investment is tenuous, at best. Much of the transportation increase is composed of planes which were contracted for years ago. This part of the economy is not going to stay strong. Light truck sales were strong, but because of significant incentives. "In sum, the strength in fourth quarter business equipment spending appears to be a one-off event."
He goes on: "How about technology, then -- is the boom back? Well, we're not partying like it's 1999 just yet. If we look at the subcategory that includes "information processing equipment and software," we see that, in real terms, IT spending increased at an annualized rate of 3.95%. This is a volatile number, but even so the growth is significantly slower than it's been the last few quarters (e.g., the annualized rate of growth was nearly 13% in Q3). On a nominal basis [actual dollars spent], the slowdown is even more severe -- fourth-quarter growth was only 0.9%.
"How to explain the discrepancy? Prices in the equipment and software category (as well as in the technology subcategory) have been declining, on average, which would make real sales increase slightly even without a rise in nominal sales. But the rest of the increase, we must presume, is due to tinkering to account for quality improvements, i.e., so-called hedonic price adjustments. The result: a nominal increase of $407 billion in equipment and software spending is magically transformed into a $581 billion increase (again, these numbers are annualized). The $174 billion difference is rather significant when overall nonresidential fixed investment increased by a mere $4.5 billion. (We have not yet figured out how to adjust our personal incomes for quality enhancements, but we've got our best people working on it.)"
click to read the rest (http://www.investorsinsight.com/print_preview.asp?id=jm021403)