13 Feb 2004 Mr. Greenspan sends investors a Happy Valentine’s present
In his testimony before committees of the House of Representatives on Wednesday and the Senate yesterday, Federal Reserve Chairman Alan Greenspan delivered essentially the same message. The extraordinary pace of productivity has reduced the need for companies to hire workers, but the lengthy spell of jobless growth is “atypical” compared to previous cycles. In his view employment should be “expanding at a reasonably good clip within a short period of time.”
During the question and answer period with the Senate Banking Committee, Chairman Greenspan supported the tax cuts of the past three years while strongly urging Congress to adopt ‘pay go’ (pay as you go) caps for spending and tax cuts. He said that tax increases should be considered only as a last resort for balancing the budget. In addition to focusing on short-term spending, he encouraged members to look at the long-term implications of increases in entitlement spending (Social Security and Medicare), taking a realistic look at whether future resources existed to meet those promises.
As is often the case, the House Financial Services committee questions were more overtly political in nature. They focused on jobs and particularly the outsourcing of jobs to China. Mr. Greenspan deflected the assertions that outsourcing was the real problem by saying that U.S. employment had remained fairly constant for the last 50 years having essentially no correlation to deficits or trade issues.
Greenspan asserted that improved primary education was the only way he knew of to reduce the ever-widening gap between the best paying positions and unskilled jobs. He reasoned that getting more students into college-level training would propel more candidates into higher paying, higher skilled jobs, thereby reducing the so called ‘skill premium.’ In other words as the supply of skilled workers approaches demand for them, prices fall. The same thing happens on the low end. By advancing people out of the unskilled labor pool, wages associated with unskilled jobs rise because there are fewer people to fill them.
He reinforced his message by pointing out that many Asian countries educated their young better than we do. Studies show that American fourth graders are ahead of their Asian counterparts, but by the time they reach the twelfth grade the reverse is true. He said the key to our economic competitiveness and job growth lay in fixing whatever problems occurred in our primary education system. For this and other reasons, education is one of our primary investment themes.
During the question and answer period Mr. Greenspan highlighted the significant numbers of jobs underpinning the reported net numbers. He said that almost a million jobs are created each week while something just over a million are either lost or abandoned by workers. Additionally, in the fourth quarter both the number of mass layoffs and the number of claimants were sharply lower than a year ago, and were the lowest for a fourth quarter since 1999. Over 60% of employers indicated some type of recall, with most expected to recall over half of their workers within six months. A recall of all laid-off workers was anticipated by 40% of employers, the most in since 2000.
The economic number of the week was Retail Sales. The report was pretty good if we remove auto sales. Without them the index increased by .9%, better than the expected rise of .6%. Auto sales fell by 3.9%, the largest decline since February of last year.
The market focused primarily on the rise in unemployment claims by 6,000 people to 363,000 last week, the highest level in two months. Expectations were for a drop of 11,000 unemployed. Continuing claims in the prior week fell 23,000 to 3.083 million.
Just released Michigan Confidence numbers fell from their highest level since November 2000 to 93.1. Surveyors repeated the mantra that the lack of job growth continues to restrain optimism about the economy. But as Bloomberg news points out, Fed studies have shown that confidence indicators don’t always predict spending patterns. Confidence tends to follow the labor market, while spending (70% of the economy) is tied more to a person’s view of his future wealth.
Reports from industry-leading companies like Dell, Comcast, Disney,Delphi, and others confirm the notion that the business component of the economy is picking up. Their confidence lends credibility to Mr. Greenspan’s assertions that job growth will pick up soon. He believes that the unusually high productivity gains from cost-cutting and full use of technology will come to an end soon. Companies will be required to hire workers to meet their growing demand for product. The stock market was pleased with Mr. Greenspan’s comments as the Dow Jones average reached a two-year high of 10,746. We are invested and ready for the recovery.