June 2005

Prospects For Recession?

Fed Chairman, Alan Greenspan, in his June testimony to Congress did little for the art of economic forecasting. Within his testimony, however, he did put forth the following reality: “And although prices of imports have accelerated [read, the dollar is dropping in foreign exchange markets], we are, at best, in only the earliest stages of a stabilization [read, a downward adjustment to our standard of living] of our current account deficit – a deficit that now exceeds 6 percent of U.S. gross domestic product (GDP).” Midway through his testimony, he generally admitted to being surprised and/or perplexed by the credit markets in that longer-term rates have declined as he raised short-term rates, i.e. the Federal funds rate. Mr. Greenspan said to this, “There remains considerable conjecture among analysts as to the nature of those market forces.”

With the monetary outlook being one of continuing, small incremental increases in short-term interest rates, we project that equity prices will remain in a narrow trading range during the summer. We suspect that the prospects for a recession may be increasing at the present time.