Greenspan clashes with reality

The other day, Alan Greenspan told us everything's coming up roses when it comes to the economy, and the right quickly had their talking heads out on the talk show circuit to echo his proclamations. I wondered how much clout the old guy still has. Turns out, not much:

The upbeat outlook from Federal Reserve Chairman Alan Greenspan has failed to convince many economists, who argue that the United States 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.

(snip)

"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 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 September rate hike, "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," said Shenfeld.

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.