Greenspan on the Expansion

Former Fed chief Greenspan is speaking in NY today. While warning that there still are excessive inventories, the pieces are falling into place for a recovery, which he suggests could be "fairly pronounced."

Looking at inventories a bit closer, there seems to be little sign thus far, outside of autos, steel and maybe semiconductor chips that production has been stepped up greater than current demand to allow a rebuilding of inventories. However, as we have noted before the key is not the change in inventories but the change in the change. Inventories were drawn down to the tune of $176.9 bln, a record, in Q2 following a $126.1 bln down in Q2. If inventories still contract in Q3 but at a slower pace than Q2, then there will be positive contribution to GDP. Actually inventory replenishment may be a Q4 09 or even a Q1 10 phenomenon.

Greenspan also suggests that productivity will lead the recovery and if true this implies another force making for only gradual recovery in the labor market. It would also seem to imply that US consumer is not going to be the engine that had been in the recent past.

The most controversial part of Greenspan's views seem to be his noted about the strength of the recovery. The Bloomberg consensus forecasts 2.3% growth next year, following growth of 2.2% in Q3 09 and 2.0% in Q4 09. The Obama Administration's budget projections assume somewhat faster growth.

Just like technicians might study what dollar bottoms look like for a price perspective (often some kind of double bottom is seen), economists study what economic bottoms look like and a case can be made that a deep slump is more often than not followed by a big bounce.

Of course this time is different. Isn't it always? The fiscal and monetary response has been huge. in the 1981-82 period, the response was estimated at just below 4% of GDP. A decade later, the policy response was estimated at just below 3% of GDP. After 2001, a little more than 7% of GDP. Now? the policy response is estimated at nearly 30% OF GDP.