Bank Economists Say Greenspan Overoptimistic About Economy

Bankers shouldn't read too much into recent hints that the economy is coming out of the doldrums.

So say several economists who argue that bankers ought to be planning for lower interest rates by the end of the year, despite Federal Reserve Chairman Alan Greenspan's talk last week of improving business conditions.

Investors saw a red light on rates after Mr. Greenspan's remarks before Congress, and banks and other stocks swooned along with the bond market.

"The markets assume the economy is roaring back, inflation will pick up, and the Fed will not only not ease credit but have to reverse itself," said Philip Braverman, chief economist for DKB Securities Corp., New York.

"Every one of those assumptions is completely, 180 degrees wrong," he said, noting that Mr. Greenspan also spoke of improving conditions in 1990 in the early stages of the 1990 recession.

"I am not saying we are in a recession now, but I certainly would not say that the risk of a recession has receded one iota," Mr. Braverman said.

The Fed eased credit slightly on July 6, for the first time in nearly three years. The move followed a series of often-criticized credit tightening steps last year that Mr. Greenspan maintained were necessary to keep inflation at bay.

He expects the Fed to lower the federal funds rate, the overnight interest rate among banks themselves, to the 5% range from its current 5.75% level by the end of the year.

Mr. Greenspan's testimony reflected several recent economic indicators. Notably, retail sales advanced 0.7% in June and the government revised May sales data to a gain of 0.9% from a much lower preliminary 0.2% gain.

"In my opinion, this isn't the beginning of a rebound in economic growth," said Edward Yardeni, chief economist at C.J. Lawrence/Deutsche Bank Securities Corp., New York.

"These indicators suggest the economy is not falling into a recession, as some have feared. Instead, it is moving sideways," he said.

Mr. Yardeni thinks easier monetary policy will be needed to revive growth in the gross domestic product beyond 2%. He expects a zero growth rate for the second quarter, 2% for the third, and 3% for the fourth.

"I have been a little surprised at the strength in the economy lately, but I still expect the Fed to take out more insurance against recession," said Sung Won Sohn, chief economist for Norwest Corp., Minneapolis.

He expects significant economic weakness to reappear in September or October, and he expects the federal funds rate to be at or below 5% by the end of the year.

Each of the economists cites weakness in the jobs market and the consumer sector as the prime reason the economy is not going to fly high again soon.

"We have passed the 400,000 level of initial (unemployment) claims, which is getting into recession territory," said Mr. Braverman.

Given this, plus high household debt levels and eroding consumer confidence levels, "it is a myth to say the consumer is back," he said.

Mr. Yardeni also said the recent trend in jobless benefits "suggests that the employment picture isn't as bright as it was last year."

Mr. Braverman noted that job creation declined sharply from the first to the second quarter, according to the government's regular survey of payrolls.

"The 177,000 increase in jobs in April, May, and June compares to around 650,000 in the first quarter," he noted. "That's clearly a dramatic change."

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