Here's a headline sure to spook any investor or economist: "Greenspan warns of likely U.S. recession." That was the headline right near the top of the widely surfed Drudge Report yesterday afternoon and this morning, referring to a speech that former Federal Reserve Chairman Alan Greenspan made the other day via satellite to a business conference in Hong Kong. Many market watchers are blaming those comments along with a weak durable goods report and the plunge in the Chinese stock market for today's stock market sell-off. But despite the inflammatory Drudge headline which, in all fairness, linked to an Associated Press story with that same title the Maestro was hardly so definitive as Drudge made him out to be. Here is what Greenspan said, according to AP:
"When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle. While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown."
Frankly, Greenspan's remarks were hardly any more revealing than the opaque testimony he used to give to Congress. It might be wise to recall his famous quote, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." Is it really a shocker that Greenspan thinks we are probably closer to the end of the expansion that the beginning? As economist Ed Yardeni calculates things, the current economic expansion has lasted 63 months so far vs. 57 months for the previous 10 cycles since 1945. So by historical standards, this expansion is long in the tooth. It's worth remembering that Greenspan's record of prognostication is a spotty one, injecting the economy with too much liquidity in 1999 and deflation fears in 2003. Market analyst Barry Ritholz notes in his wonderful Big Picture blog that when he heard about Greenspan's moderately downbeat comments, it "all but pushed me into the Bullish camp, nearly cancelled my recession forecast, and almost made me revise my market prediction to Dow 16,000."
And on the positive side, Greenspan pointed out that "so far we have not had any major, significant spillover effects on the American economy from the contraction in housing." Also on the economic front today, existing-home sales reached the highest level in seven months and consumer confidence numbers reached their highest levels since August 2001, before the 9/11 terrorist attacks. As for the nasty durable goods report, which shows new orders fell 7.8 percent in January, the economics team at First Trust Advisors finds this silver lining:
"There is nothing unusual about a large single-month drop in orders in the midst of a re-acceleration of economic growth. Just take the last business cycle. After a slowdown in economic growth in 1995, in January 2006at the very beginning of the surge in real GDP growth in the late 1990snew orders for durable goods dropped 5.5 percent, and shipments of nondefense capital goods ex-air dropped 4.4 percent. And yet real GDP increased 4.4 percent in 1996. We get a hint of that in the most recent data on unfilled orders, which remain high and growing rapidly, suggesting more business spending ahead."
Today's Carnival of the Capitalists Question. All week I answer questions posed by contributors to the Carnival of the Capitalists, a website that gives a weekly summary and analysis of the top economic and business blog postings. A query from "cehwiedel": I would ask Mr. Pethokoukis what he sees as a next possible skirmish in [Internet regulation], beyond net neutrality. Who will try to impose regulation, what sort of regulation, and why? First, let me tackle net neutrality, which is the idea that broadband providers should be prevented from selling different tiers of services with different pricing based on the speed of the bandwidth used, among other factors. Providers worry that such a regulatory straitjacket would crimp innovation, while net neutrality proponents worry that individuals or small businesses would be pushed into an Internet slow lane unless they paid up. Even though many congressional Democrats have come out in favor of net neutrality, don't expect them to do much about it. "I don't think it's real likely that anything will happen in this Congress," says Paul Glenchur, a telecom policy analyst at the Stanford Group in Washington. And that's pretty much the consensus opinion since the Dems are hardly unified on the issue and they only narrowly control Congress. And even if they did pass a net neutrality bill, there's an excellent chance President Bush would veto it. Besides, Glenchur adds, "Congress tends not to move unless there's a crisis ... and there's not yet a severe problem."
As for what's next, Glenchur thinks there will be increasing momentum to do something about the so-called digital divide, whether it's people in rural areas who don't have the access to high-speed broadband or poorer Americans who can't afford it. In his recent presidential announcement, Sen. Barack Obama said it was time to "lay down broadband lines through the heart of inner cities and rural towns all across America. We can do that." So look for efforts to get the federal government to subsidize such "universal access" plans, with funding possibly coming from some sort of tax built upon or similar to the Universal Service Fund fee already applied to long-distance telephone calls.