Federal Reserve chairman Alan Greenspan testified before the joint economic committee of Congress today and gave reassuring word that the economy, while somewhat soft in the first quarter, continues to remain strong overall.
The remarks first focused on the overall look of the economy and the second half focused on long-term lending rates and in turn the housing market. He said that the stops and start of the economy are tied to petroleum prices.
“A major economic development over the past year has been the surge in the price of oil. Sharply higher prices of oil imports have diminished U.S. purchasing power. The value of petroleum imports rose from 1.4 percent of nominal GDP in the first quarter of 2004 to 1.8 percent in the first quarter of this year. The alternating bouts of rising and falling oil prices have doubtless been a significant contributor to the periods of deceleration and acceleration of U.S. economic activity over the past year.”
Another point he mentioned was that no one is saving any money, a problem he’s mentioned before. He went on to say though that spending has firmed and business investment is a bit better.
He said the long-term interest rates, tied to the 10-year Treasury note, were the biggest surprise of the year. They continued to remain low, despite an increase in the federal funds rate. The yield on the 10-year notes was lower than a year ago. These continued rates keep the housing industry booming in the United States.
There were a couple of points worth noting though. First, housing prices in some areas continue to climb as a result of speculation but this is a local phenomenon. He didn’t seem to think this was widespread phenomenon mainly because one, people would have to move, and two, closing costs and commissions command a fairly sizable amount of money.
The other thing worth he said was that turnover of homes has gone up. He said people buy second homes either for investment or for vacation and that speculation may play more of a part in the transactions with these homes as people aren’t forced to move.
The lack of savings by people has been mentioned many times and the Fed has stressed in the past this would be a key to helping the country out of the alleged social security crisis as baby boomers begin to age.
The question to ask is this though. Since we have a service-based economy and much of that service economy is built around disposable income, what happens when the affluent baby boomers start pulling some of that disposable income out of the service economy and save it. What happens when the demographics most advertising is aimed for in today’s market starts pulling their disposable income and saving it? Does the service-based economy survive? What’s left? Sure the electric company will get paid and food will be bought at the grocery but what about all the other stuff? Movies and concerts, computer games and game consoles; all this, despite some people’s insistence to the contrary are disposable and many people will be forced to quite simply do without.
John Stith is a staff writer for murdok covering technology and business.
