Tags: Greenspan: | Deficits | 'Severe' | Threat

Greenspan: Deficits a 'Severe' Threat

Friday, 02 December 2005 12:00 AM

Outgoing Fed Chief Alan Greenspan has warned that an unmanageable and ever-growing federal budget deficit could bring severe results for the U.S. economy.

Bloomberg News reports that the chairman cited skyrocketing pension and medical costs - among other factors - as "severe" threats to an otherwise "positive" outlook for the economy. He made the statements in a videotaped speech shown today.

This was one of the last chances Greenspan would have to voice his concerns about the federal budget. His successor, Ben Bernanke, has announced that he is unlikely to comment on specific budget issues after he takes the post.

"Crafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay," Greenspan said in today's speech, according to Bloomberg. "In the end, the consequences for the U.S. economy of doing nothing could be severe."

In November, the chairman told Congress that balancing the massive budget deficit would prove even more difficult due to extensive "post-hurricane reconstruction and relief."

Still, Greenspan, who retires in January, insisted that the 2005 economic performance has been "solid," even in the face of the year's devastating hurricanes. He also said that "economic activity appears to be expanding at a reasonably good pace as we head into 2006."

Greenspan warned against excessive tax increases as a solution, saying they might stunt U.S. economic growth. Instead, he suggested using mainly spending cuts.

The one sour note struck this week - going against an otherwise bullish economic climate - comes from the auto sector, where Ford has followed in GM's footsteps by closing plants and laying off workers.

Both Reuters and The Wall Street Journal report that the automaker is going to jettison five plants and 7,500 workers - roughly 6% of its North American workforce.

The Journal cites inside sources at Ford who say the company would shutter manufacturing sites in St. Louis, Atlanta and St. Paul, Minn., as well as an engine-parts plant in Windsor, Ontario, and a truck-assembly plant in Cuautitlan, Mexico.

There is no specific timetable for the moves, but the paper reveals that Ford is in significant economic peril and is planning to unveil a radical restructuring in North America early next year.

Ford took a major body blow in the third quarter, announcing losses of $284 million. The company said Thursday that sales fell for a third straight month, down 18%. The firm cut its production forecasts for the first and fourth quarters.

Ford has already issued a statement saying it will cut 10% of its North American white-collar workforce -- that's about 4,000 jobs.

All this is a double whammy for the city of Atlanta.

Besides the closing of the Ford plant, GM also is planning on getting rid of its suburban Atlanta manufacturing plant. 

This week the White House forecast 3.6% economic growth in 2006 - a 1% rise over earlier estimates.

That pretty much jibes with what we're hearing from economic experts who say that the economic forecast for 2006 is mostly sunny and won't be as balmy as things were in 2005.

One key economist says the U.S. economy is still strong after three years of expansion but that growth will be moderate in 2006.

According to a press release citing James Gwartney, director of the Stavros Center for the Advancement of Free Enterprise and Economic Education at Florida State University: "High gasoline prices and rising interest rates will contribute to sluggish growth next year, and neither of those problems can be easily fixed, Gwartney said. Neither increasing supply nor decreasing demand of gasoline can be done quickly, and any action that the Federal Reserve takes to lower short-term interest rates could actually increase inflation and, subsequently, long-term interest rates. An increased rate of inflation, which is already expected to be around 3 percent in 2006, would cause lenders to raise the long-term interest rates even more in order to cover their own increased costs, Gwartney explained."

The release says Gwartney expects interest rates to rise slowly but steadily during the first six months, and that he notes that rates will "probably go up to about 7% in 2006."

"That will make a big difference in sales of big ticket items like automobiles and housing. The combination of rising interest rates and high gas prices are likely to be a major drag on the economy in 2006," says Gwartney.

The report goes on to say that "the new year will have a bright beginning, however, thanks to above average holiday sales, an indication that consumers still have a good deal of confidence in the economy. Family incomes increased by about 2.5% in the past year, and the unemployment rate could dip below 5% in the coming year."

Based on mainstream media accounts, you'd think that U.S. pension plans were going the way of the dinosaurs.

But the facts tell a different story - and that's good news for American workers and the U.S. economy.

That's the determination after a new study from Fidelity Investments reports that while there have been several high-profile pension bankruptcies recently, the overall health of defined-benefit plans has improved steadily over the past three years.

"The percentage of underfunded corporate plans dropped from 69% in 2002 to 50% in 2004", says Drew Lawton, president and CEO of Fidelity Management Trust Co., which surveyed 189 corporate and public plans with more than $200 million each in assets.

While only 13% of plans were 91 to 99% funded in 2002, that number increased to more than 25% in 2004. Moreover, 96% of DB plan sponsors say that they were very or somewhat likely to continue offering a DB plan to participants over the next five to 10 years. Nearly half of employers cited employee retention as their primary driver for keeping DB plans, Fidelity says.

However, the funding situation isn't completely rosy.

J.P. Morgan Chase & Co. estimates the average pension plan is about 84% funded and will need about 11% investment return over the next 7 years to reach full funding. The problem is the investment firm estimates the markets will only return about 7.5% in that period, meaning plan sponsors would have to fill the 3.5% gap with contributions.



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Outgoing Fed Chief Alan Greenspan has warned that an unmanageable and ever-growing federal budget deficit could bring severe results for the U.S. economy. Bloomberg News reports that the chairman cited skyrocketing pension and medical costs - among other factors - as...
Friday, 02 December 2005 12:00 AM
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