Alan Greenspan has given two speeches this month. He was unusually talkative. He declaimed at length about financial crises, productivity, job training, education. But in all those hundreds of words, not one dealt with the current condition of the long economic expansion.
That is understandable. Talking about the expansion at this particular moment could get him or the economy, or both, into trouble. Wall Street hangs on his words, ready to send stock prices soaring if he signals that the Federal Reserve no longer needs to raise interest rates; the bubble that had seemed to subside would balloon again. Or he could warn about inflation, suggesting that it might accelerate because scarce workers are demanding, and getting, higher pay. The implicit solution: Let unemployment rise — in an election year — to tame the workers.
No wonder his speeches dwell on easier themes. He puts off assessing the economy until he can put it off no longer. That moment will come on Thursday when, as Fed chairman, he testifies before Congress on the state of the economy. The trick will be to explain what is happening without having the explanation change what is happening.
Greenspan will almost certainly note that the economy slowed in the second quarter from its blistering winter pace. He has no choice: The statistics are fairly convincing. The argument that saw the Fed through six interest-rate increases over the past year is temporarily unavailable. The economy no longer appears to be growing so rapidly that the demand for goods and services exceeds the supply, threatening faster inflation.
But does that mean that the Fed is done raising rates? Is further slowing no longer necessary? Greenspan certainly does not want to leave that impression.
Just as rate increases or the threat of them tend to inhibit stock market investors — for myriad reasons, not all of them rational — the suggestion that rates won't rise tends to produce exuberance. Stock prices could climb after months of moving sideways. Demand and spending would then grow as stock portfolios fattened and consumers felt flush again — a sequence called the wealth effect. And the economy's growth rate would rebound to what the Fed considers an inflationary level.
Maybe things have changed, and the old exuberance can no longer be summoned so easily. "The tone of the marketplace is a lot more subdued than it was six months ago," said Albert Wojnilower, a Wall Street economist. But soaring stock prices and a revived wealth effect remain dangers that are likely to prevent Greenspan from declaring that the economy has slowed enough.
So he will almost certainly lace his assessment with caveats and ambiguity. After all, the growth rate cooled in the second quarter of 1999, only to turn torrid over the next nine months.
Moreover, not all of today's statistics portray a slowdown. Some, including the retail sales report on Friday, suggest unexpected strength. Loan rates still encourage borrowing. And the data is still coming in for June, not to mention July. Who knows what those numbers will tell the Fed before its next policy meeting, on Aug. 22?
"The sensible thing for Mr. Greenspan to say is that there have been scattered signs that economic growth is moderating, but they are far from convincing," said Chris Varvares, a partner at Macroeconomic Advisers in St. Louis. "That is our view, and that leaves the door wide open for him to do what he wants."