In this part of the world, we rarely regard our central bankers as deities, but Federal Reserve Chairman Alan Greenspan is steadily assuming that status in the US.
His most recent Congressional testimony in July provided huge relief to financial markets. He portrayed a very benign picture of the US economy, alluding to the signs of slowdown in consumer demand and housing. He also stressed the huge part that rising productivity had played in delivering 10 years of uninterrupted growth, with little accompanying inflation. Such a phenomenon is relatively unprecedented in recent economic history and a whole literature and research industry has grown up around the notion of the "new economy".
There are many who dispute "new economy" thinking, but Mr Greenspan is not numbered amongst those. He is a firm believer in the notion that changes have occurred in the structure of the US economy that have allowed it to grow so strongly with little pressure on inflation. From the point of view of the markets, all that really matters is what Alan Greenspan believes, as he is the one who will ultimately determine the future path of interest rates. Most recent evidence suggests that he has right on his side.
The relaxed tone of Mr Greenspan's utterances in July numbers him amongst those who believe that the US economy will achieve a soft landing over the coming months. Such a soft landing would ensure little or no need for further interest rate tightening.
There had been a growing body of opinion in recent months that believed that the economy would have to be brought down sharply from its highs by more aggressive interest rate tightening. This view of the world is clearly not one conducive to equity market stability and for very good reason.
A hard landing would be detrimental to future corporate earnings, and share prices and company valuations would adjust accordingly. Even those who did not buy into the hard landing scenario felt that Mr Greenspan was being way too relaxed in his approach to Congress.
However, either due to supreme skill and prescience, or luck, all subsequent data releases have vindicated his relaxed tone. The markets are now firmly convinced that the Fed will remain inactive at the August 22nd FOMC meeting and the subsequent meeting in October just ahead of the presidential election.
Economic growth itself as measured by GDP was quite strong in the second quarter, recording an increase of 5.2 per cent. However, a sharp increase in stocks of unsold goods or inventories made a strong contribution to growth. This factor is expected to unwind in the third quarter leading to slower growth. Consumer spending also slowed quite sharply, a development that would give Mr Greenspan particular pleasure.
In addition, the price elements of the report indicated few inflationary pressures and the markets were prepared to give Mr Greenspan and his gradual slowdown story the benefit of the doubt. This belief has been strengthened by the July employment report last week.
It showed monthly growth in employment slowing significantly once again compared to the growth that was being recorded earlier this year and late last year. Another interesting and comforting aspect of the employment report was the increase in the pool of available labour from 9.84 million to 10.13 million. This is an indicator of labour market tightness that Mr Greenspan looks at very closely.
The recent trend in it will help reassure him that labour market conditions do not pose a threat to longer-term price stability. He also believes that job insecurity is rising in the economy, a development that is difficult to tally with an unemployment rate of just 4 per cent, but Mr Greenspan believes it and that is all that matters.
Mr Greenspan's public pronouncements suggest that he is an enlightened central banker who is not disposed towards tightening interest rates for the foreseeable future. His apparent sense of euphoria at recent developments in the economy was compounded by the figures on productivity released earlier this week.
Productivity measures the hourly output of workers in the economy, and if the growth in physical output is actually increasing faster that wages, then any central banker would be happy. This is indeed what is happening in the US.
Productivity in the non-farm sector expanded by 5.3 per cent in the second quarter, to give a year-on-year growth rate of 5.1 per cent. Such magnitudes might not mean much to those who do not look closely at such matters, but it is an impressive performance. More specifically, the 5.1 per cent growth rate is the highest in 17 years.
As a result of the strong growth in output per worker in the economy, unit labour costs fell in the second quarter. There is a message here for Ireland and that is that if productivity growth is stronger than growth in labour costs, competitiveness will not be affected. This is the case in Ireland thus far, but productivity growth had better not slow.
The ability of US workers to produce so much more is generally attributed to the use of enhanced technology, at least this is what Mr Greenspan believes. Others argue that the overall productivity numbers mask the fact that a few narrow sectors such as technology enjoy all of the productivity gains, while more traditional sectors have lower levels. Recent research from the Federal Reserve Bank of New York attributes the lack of inflation in the economy over the past decade to a relative decline in import prices, rather than higher productivity.
The jury is out but the important point from the perspective of the markets is that Mr Greenspan is a firm believer. This week's data will have persuaded him that there is no need to tighten interest rates any further for the foreseeable future. This should continue to provide a good environment for US equity and bond markets, and indeed for the dollar.
Meanwhile in Europe, Mr Wim Duisenberg does not believe that there is much evidence of "new economy" in his jurisdiction. As a consequence he is likely to be much more trigger-happy over the coming months. While Mr Greenspan will be perfecting his tennis game, Mr Duisenberg will be accumulating more grey hairs at every sign of economic growth.
