Financial markets have to quit hanging on Alan Greenspan’s every word. That’s because the former Federal Reserve chairman’s economic forecasting skills aren’t always right.
A review of some important events in recent economic history — such as the dot-com implosion in 2000 or the 1990 recession — shows that Greenspan has had some big misses.
Two years ago, for example, he said that the jump in oil prices was a “transitory” factor boosting inflationary pressures. Crude oil was trading at $40 a barrel at that time; today, prices are around $60 a barrel, and that’s down from a high topping $78 a barrel over the summer.
Of course, all economists get things wrong, but when others do, the entire financial world isn’t listening.
Greenspan left the helm of Fed in January after an 18-year tenure, and now runs a consulting firm that bears his name. He has continued voicing his views on the economy, and while they don’t offer direct insight into the Fed’s monetary policies, his comments still carry weight.
That’s why so much attention has been paid to his recent upbeat assessment of the economy. Greenspan told attendees Monday at an economic conference that the “worst is behind us” in the economic impact of the housing slump. He also said strong profit margins and capital spending are good signs of what’s potentially to come.
“The economy is obviously going through a significant slowing period, which as best I can tell is more than likely temporary,” Greenspan said during a question and answer session at the annual Charles Schwab Impact conference in Washington.
Greenspan said that while housing is not out of the woods, the current slump may not worsen and “it is no longer subtracting from the (gross domestic product) growth.”
He echoed those remarks in another speech Thursday.
Such a positive outlook sounds comforting given that U.S. economic growth slowed to a weaker-than-expected 1.6 percent annual rate in the third quarter — the lowest since the 1.2 percent growth rate seen in the first quarter of 2003 as the nation prepared for the war in Iraq.
The current pullback has largely been blamed on the slumping housing market, with investment in homebuilding cut during the quarter by the largest amount in 15 years. The housing collapse shaved 1.12 percentage points from the third quarter’s overall economic growth, the most in almost 25 years.
Many in financial circles believe that the slowing economy and moderating inflationary pressures will allow the Fed to keep interest rates steady. After boosting rates 17 times since June 2004 to slow the economy sufficiently to thwart inflation but not so much that it tips into recession, the Fed has left rates unchanged three meetings in a row.
But before anyone hangs their hopes on Greenspan’s predictions that better times could be ahead, the economics team at Merrill Lynch took note of some of his forecasting fumbles from the past.
Greenspan told his Fed colleagues on the Aug. 21, 1990, Federal Open Market Committee meeting, where interest rate policy is set, that a recession wasn’t likely in the cards.
“I think there are several things we can stipulate with some degree of certainty; namely, that those who argue that we are already in a recession I think are reasonably certain to be wrong ... ,” Greenspan said.
But as Merrill chief North American economist David Rosenberg notes, it would later be known that the recession had started in July of that year.
Then there was a March 6, 2000 speech, which came just as the unprecedented bull market was peaking. Greenspan said the fact that “the capital spending boom is still going strong indicates that businesses continue to find a wide array of potential high rate-of-return, productivity-enhancing investments. And I see nothing to suggest that these opportunities will peter out any time soon.”
“But peter out they did,” Rosenberg said in a note to clients. “Tech capex went from a 20 percent year-on-year growth rate at the time of the speech to zero a year later; the Nasdaq (composite index) collapsed by 60 percent.”
It’s too soon to tell if Greenspan is getting it right or wrong this time around. But it’s pretty clear his rosy outlook is not shared by executives of homebuilders.
On Tuesday, Beazer Homes USA Inc. posted a 44 percent decline in quarter earnings due to lower demand for new homes. Also this week, luxury home builder Toll Brothers Inc. forecast a 10 percent drop in quarterly construction revenue due to rising order cancellations. It sharply cut its production forecast.
“We continue to look for signs that a recovery is imminent but can’t yet say that one is in sight,” Robert I. Toll, chairman and chief executive officer of the Horsham, Pa.-based company, said in a statement.
A year from now, maybe things will really be looking up, and Greenspan’s view eventually will be correct. But from the way things seem now, betting on Greenspan’s outlook would be risky.