In recent presentations, Federal Reserve chairman Alan Greenspan has given a tour de force of optimism about the economic outlook.
The Fed’s semi-annual monetary-policy report to Congress assumed 4 ? to 5 percent growth of gross domestic product in 2004, fast productivity growth, and a decline in the unemployment rate by the fourth quarter to between 5.25 and 5.5 percent (versus 5.6 percent today).
Even better, the Fed implied the possibility of a 4 percent potential GDP growth for the U.S., which is well above assumptions from the Office of Management and Budget and the Congressional Budget Office. Greenspan also raised the possibility of a spectacular 4 percent non-inflationary unemployment rate.
The Fed’s economic assumptions, if realized, would probably cause a sharp decline in the budget deficit, perhaps even a move into surplus depending on the growth in spending. In testimony, however, Greenspan expressed concern over the budget deficit — but it wasn’t clear if he was basing this on the Fed’s economic assumptions or less-optimistic scenarios like those imbedded in the OMB and CBO budget outlooks.
In his February 23 speech on the consumer and consumer debt, Greenspan made several important observations about the economic health of the U.S. household.
In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income.
Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector’s debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable.
In particular, this view of the consumer is good reason why everyone should be optimistic about the sustainability of the economic expansion. But from many more angles, chairman Greenspan is correct about the solid economic prospects for the U.S.
Fast growth, mild inflation, strong corporate-profit growth, consumer resilience, and — to be consistent — substantial increases in interest rates and bond yields, are all in the cards.
– David Malpass is the chief global economist for Bear Stearns.