The upbeat outlook from US Federal Reserve Chairman Alan Greenspan has failed to convince many economists, who argue that the US is likely to see tepid growth at best in the near future.
Greenspan on Wednesday said the economy appears to be weathering a slowdown related to the steep rise in oil prices, arguing that the expansion "has regained some traction."
But some experts say Greenspan may be putting the best possible spin on an economy that is just muddling through.
Lehman Brothers chief US economist Ethan Harris said Greenspan is "trying to talk up the economy" and signal that the economy is strong enough to sustain the expected quarter-point interest rate boost at the Fed's Sept. 21 meeting.
"With still-fragile confidence and less than full employment, the Fed does not want to undercut the recovery with pessimistic talk," Harris said.
"The problem with the soft-patch theory is that it puts too much emphasis on the run-up in oil prices. A series of factors are weighing on growth," he said.
Avery Shenfeld, senior economist at CIBC World Markets, said Greenspan's comments to lawmakers were more upbeat than the central bank's Beige Book report the same day.
Shenfeld said there may be some political reasons for Greenspan's outlook, with US President George W. Bush facing a tough re-election challenge.
"The Fed chairman is not above politics," said Shenfeld, who argues that the central bank has put itself in the position of boosting rates weeks before the presidential election or acknowledging that the economy is faltering.
To skip a rate hike this month, "Greenspan would have to acknowledge more meaningful concerns about the direction of the economy, testimony that would be immediate fodder for [Democratic presidential candidate John] Kerry's campaign," Shenfeld said.
More bluntly, Morgan Stanley chief economist Stephen Roach said there is little to back up Greenspan's view on gaining traction.
"With all due respect to Mr. Greenspan, at this point in time, such a claim is largely an assertion based on a very creative interpretation of ever-volatile hard data," Roach said.
"Yes, consumer demand rebounded in July, but that came after a terrible June. Moreover, major retailers reported disappointing back-to-school sales in August and there was renewed softness in motor vehicle sales, as well. Meanwhile, there are signs of mounting inventory backups -- a classic warning sign of production adjustments to come," Roach said.
A Wall Street Journal survey of 55 economists indicated most are downgrading their forecasts. The average outlook called for a 3.6 percent rate in the third quarter and 4.0 percent in the fourth quarter. As recently as June, the panel had forecast growth at an average rate of 4.3 percent over the rest of the year.
Merrill Lynch's David Rosenberg sees growth closer to 3 percent, as the effects of tax cuts and low interest rates fade.
"Notice how we don't hear about the `greatest economy in the past 20 years' anymore?" he said. "The second-quarter soft patch, meanwhile, looks to be intact so far in the third quarter -- confirmed by the 'facts-on-the-ground' findings from the recent Fed Beige Book."
Nariman Behravesh at the economic research firm Global Insight said oil prices are unlikely to drop significantly and "will remain a drag on the economy," putting the Fed in a difficult situation.
"Uncertainty about oil prices, along with slower economic growth, will complicate the task of the Federal Reserve, which has embarked on a path of slowly but steadily rising interest rates," he said.
But he said the tame inflation news eases the pressure on the Fed, suggesting it may be less aggressive in boosting rates than anticipated.
"If the news on `core' inflation remains benign, the Fed may be able to concentrate on the damage to growth from high oil prices, rather than its effect on inflation," he said.
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