NEW YORK (AP) -- The Federal Reserve chairman covered the span of economic possibilities for Congress last week, providing hope to those who see the economy improving but giving ammunition to the pessimists as well.
There are signs, he testified, that the slowdown is easing. "We are seeing signs that the bottom is beginning to structure itself" is the way he put it. And next year, he indicated, expansion will resume.
But he warned also about the perils ahead: Economic weakness abroad, uncertainty about corporate willingness to spend on plant and equipment, rising unemployment and the perpetual mystery of the consumer mind.
It isn't just lost jobs that create doubts in the latter category. The condition of household balance sheets isn't very good. Much debt, and a decline in net worth. And a tendency to wait and see.
The Fed's "flow of funds" report shows household net worth since the second quarter of 2000 has fallen by 8 percent, or $3.4 trillion. And this has occurred despite increases in the value of real estate and durables.
Analyzing the Federal Reserve flow of funds account issued in mid-June, the Financial Markets Center, an independent think tank, points out that individuals' direct holdings of equities tumbled by 36.9 percent from a year earlier. Additionally, their mutual fund shares fell 16.8 percent and pension fund reserves declined by 7 percent.
Statistics such as these hardly support enthusiastic buying, and the near-zero savings rate supports the belief that there's a great deal of stress in American households. And rising debt-to-income levels add to it.
Depending on the consumer to assume leadership, to accept the risks, is asking a lot. And considering consumer finances, they might make a mushy foundation on which to build the next economic skyscraper.
Analyst Jane D'Arista of the markets center observes that the $539.9 billion first-quarter rise in household debt was more than five times the rise in disposable personal income.
If the consumer balks, then it might follow that business will be reluctant to spend on new plants and equipment. Why expand if the markets don't?
All this isn't designed to prove that the economy can't produce miracles; it's done so in the past. But in just one area of the economy, the consumer sector, it shows what a risk and an art monetary policy is.
While the Fed can deal with many of the issues it faces by raising or lowering interest rates -- and Alan Greenspan, the Fed chairman, indicated that lower rates might be needed -- that isn't the all-purpose remedy.
There is, for example, the sub-par condition of markets in other areas of the world, including parts of Europe, Latin America and Asia. These are huge markets for American exports, necessary to U.S. economic health, just as it is in their interests to sell to us. It's a two-way highway.
Americans have urged Europeans to lower interest rates to spur their economies into expansion, the better for U.S. exports. But fearing inflation, Euro-dollar nations last week declined to cut, citing the threat of inflation. The Fed can urge, but it cannot dictate to them.
Neither can it dictate to the White House.
While U.S. manufacturers, labor and farm interests have sought government intervention to lower the U.S. dollar's value, the better for American exporters, President Bush declines to do so.
Shrinking the dollar's value might conceivably help exporters sell their goods abroad, he pointed out last week, but it is the dollar's high value relative to other currencies that attracts foreign investments.
As a consequence, much of the expansion challenge falls upon the back of consumers. And while they might come through, as they have before, their risk quotient is decidedly lower than it was two years ago.
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