U.S. boom has limits, Greenspan cautions

Imbalances' can end long run of growth, Fed chairman warns


WASHINGTON -- Despite a remarkable run of prosperity that he credited in large part to new technology, Federal Reserve Chairman Alan Greenspan delivered his bluntest warning in months yesterday that the economy could still be derailed by its old nemesis, inflation.

Delivering a sweeping analysis of the forces reshaping the economy at home and abroad, Greenspan said the ability of businesses to use rapid advances in computers and communications to hold down costs and produce higher-quality goods and services had helped hold down price increases, bolster the stock market and allow the economy to grow robustly.

But he said it would be risky to assume that technology could continue to keep the economy and Wall Street surging forever or that the business cycle and all the old economic rules had been repealed.

"As I have said on previous occasions, there are imbalances in our economy that, unless redressed, will bring this long run of strong growth and low inflation to a close," Greenspan said in remarks to bankers in Chicago.

At the top of his list was declining unemployment, which he said would eventually push wages and perhaps prices higher in an inflationary spiral.

He added the possibility of a stock market downturn, which he said would cause consumers and businesses to cut their spending.

And he said the rapidly growing trade deficit could one day become unsustainable, though it has caused no trouble so far.

Greenspan's inflation warning and his observation that many people think stocks have risen to levels "well beyond the justifiable" rattled Wall Street, sending bond prices sharply lower and equities down slightly.

While it gave no indication that the Fed has any plans to raise interest rates, Greenspan's speech seemed intended as a cautionary flag to those investors and economists who have concluded that the United States has built a "new economy" in which inflation has been vanquished, corporate earnings will rise forever and the central bank remains on the sidelines.

Greenspan has helped drive the talk of a new economy by holding back pressure from traditionalists inside and outside the Fed for interest rate increases as steady growth has pushed unemployment down to a 29-year low of 4.2 percent without generating inflation.

But Greenspan is very sensitive to any impression that he has gone soft on price stability, and yesterday he planted one foot firmly in the inflation-hawk camp without quite removing the other from the new-age camp.

"I do not say we are in a new era, because I have experienced too many alleged new eras in my lifetime that have come and gone," said Greenspan, who is 73 and has been running the Fed for almost 12 years.

"We are far more likely, instead, to be experiencing a structural shift similar to those that have visited our economy from time to time in the past," he said.

"These shifts can have profound effects, often overriding conventional economic patterns for a number of years, before those patterns begin to show through again over the longer term."

Economists said they still expected the Fed to hold rates steady at its next meeting May 18.

But they said Greenspan clearly wanted to guard against complacency within the Fed and in the financial markets, especially if the unemployment rate is found to have fallen again when the Labor Department releases April's jobs data this morning.

Feet on the ground

"He may have felt he needed a way to get our feet back on the ground without going overboard in that direction," said L. Douglas Lee, an economist at HSBC Securities.

Greenspan was careful to point out the economy's strong points in addition to the potential pitfalls.

He noted that the worst of the global financial crisis seemed to have passed. And he devoted much of his speech to the case that technology has greatly improved the growth rate of productivity, or output per worker, the measure considered the most important in determining the economy's long-run potential.

Productivity growth, which has been sluggish for nearly three decades and which slipped below 1 percent in the early 1990s, averaged 3 percent over the most recent four quarters, Greenspan said.

Help from high-tech

The Fed chairman said the reason appeared to be the heavy investment in technology made by American business over the past five years.

Computers, databases and faster and more reliable communication have all enabled companies to operate more efficiently by reducing their need for extra inventories of parts and extra workers, he said, since they have a much better handle on what is happening almost minute by minute in their markets and within their operations.

The consistent increases in analysts' projections for long-term corporate earnings growth, Greenspan said, suggest that companies are telling Wall Street that they expect productivity increases driven by technology to continue.

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