WASHINGTON-Federal Reserve Chairman Alan Greenspan last week said that despite benefits of increased productivity, stepped-up capital spending and unprecedented wealth creation, the high tech-driven New Economy may be growing too fast for its own good.
“Until market forces, assisted by a vigilant Federal Reserve, effect the necessary alignment of the growth of aggregate demand with the growth of potential aggregate supply, the full benefits of innovative productivity acceleration are at risk of being undermined by financial and economic instability,” said Greenspan at Boston College last Tuesday.
Greenspan said trade deficits and labor shortages, combined with unbridled high-tech growth, could intensify inflationary pressures. The Boston College speech and remarks the following day in San Antonio, in which Greenspan warned bankers against making loans on the assumption the robust economy is here to stay, were viewed as not-so-subtle hints that the Fed intends to raise interest rates to cool the economy.
Since June, the Fed has boosted interest rates four times in hopes of dampening inflationary tendencies in the booming U.S. economy. That seems to have done the trick for many Old Economy companies. Indeed, the Dow Jones industrial average went into a free fall last Tuesday after Proctor & Gamble warned of lower-than-expected earnings.
Nasdaq high-techs, by contrast, are all but ignoring Greenspan. That is what has the Fed chairman worried. Investors believe the growth potential in wireless, Internet and other New Economy stocks is so great that a quarter-point interest rate hike here or there is largely inconsequential.
Compounding the dilemma for Greenspan is the fact that investors increasingly are fleeing blue-chip stocks for red hot high techs.
As such, the Fed is expected to again raise interest rates when it meets on March 21. “Interest rates don’t affect growth rates,” said John Bensche, a telecom analyst at Lehman Brothers.
Bensche said this is so because New Economy firms typically do not have to borrow money. Instead, he said, they raise huge amounts of money through initial public offerings and, thus, do not factor corporate bonds into the equation.
“The Nasdaq is what’s driving the wealth effect,” said Bensche. He said the growth rate of earnings in New Economy firms is enormous.
Cynthia Motz, an analyst at Credit Suisse First Boston, agrees.
“Over the long haul, what Greenspan does is not going to affect the wireless stocks,” said Motz. “I think the wireless industry is going to be fueled by some incredibly strong growth trends. “
Motz predicts wireless minutes will displace wireline minutes and that new wireless applications will increase in the future. “I think the world is going wireless,” she said. “I’m extremely bullish on the stocks and the industry in general,” said Motz, who put out a new report last week making those very points.
At the same time, Motz noted that many wireless firms hold significant debt. “To the extent that rates go up, the cost of debt goes up,” said Motz. But more than counterbalancing that, she said, are the strong fundamentals of wireless firms.
All that said, neither Greenspan nor Wall Street seem to know how much of the high-tech bull market is speculation and how much is real.
In addition to inflationary pressures wrought by the New Economy boom is the prospect of worker insecurity. “The marked move of capital from failing technologies to those at the cutting edge has quickened the pace at which job skills become obsolete,” said Greenspan.
