BUSINESSWEEK ONLINE : JULY 31, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY The '70s Specter That's Haunting Greenspan He fears an oil-shock reprise--but he's in the minority Federal Reserve Chairman Alan Greenspan was trying to engineer his first soft landing of the economy in the summer of 1990 when Iraq invaded Kuwait. Oil prices doubled on fears of big disruptions in supply from the Middle East. Consumer confidence collapsed. And instead of settling in for an extended expansion, the economy crashed into a recession. So it's not surprising that Greenspan is haunted by the dangers of soaring oil prices as he attempts once more to land a high-flying economy safely on terra firma. A keen student of economic history, he's also aware that soaring oil prices like those of the 1970s can have unexpectedly deep and adverse effects on the economy. The concern this time: An old-fashioned oil price shock could disrupt the otherwise smooth running of the New Economy by pinching profit margins and pushing up wages. TIME LAG. In fretting about this latest oil price runup, Greenspan is in a distinct minority among economists. Most of his colleagues just don't think it's that big a deal. Yes, crude oil prices have tripled over the past 18 months. But oil accounts for a much smaller part of the economy than it did in the past--about 1% last year compared with 6.5% at the end of the '70s and 2.5% in 1990. And so far there's scant sign of the price rise feeding into the rest of the economy. Though energy prices soared 5.6% in June, after stripping out food and direct energy costs the so-called core consumer prices rose just 0.2%, the same as in May. But Greenspan knows that such optimism could prove premature. It usually takes about 18 months for the full impact of an oil price rise to be felt. That means it's too early to conclude that the economy has weathered this year's runup in energy costs without suffering big damage. ''Most of the effect has still to come through,'' says Andrew Oswald, an economics professor at Warwick University in England. Besides, there's no guarantee that oil won't go higher. Prices once again soared almost 4%, to nearly $32 per barrel, on July 18 after the OPEC oil cartel signaled that it was not going ahead with a 500,000 barrel-per-day production hike the market was hoping for. Moreover, soaring oil prices are pushing other energy costs, such as natural gas and electricity, higher as well. History suggests that Greenspan is right to be cautious. Every time oil prices have spiked over the past 30 years, the economy has fallen into recession. It happened in 1973 and 1979 and helped push an already weakened economy over the edge in 1990. And as if that weren't bad enough, the twin oil shocks of the '70s were accompanied by a sharp, still largely unexplained slowdown in productivity growth that plagued the economy into the mid-1990s. While no one--not even Greenspan-- is suggesting that that could happen again, there's still a risk that the latest oil price shock could upset the productivity-driven New Economy. The key is corporate profit margins. If companies can't offset rising energy prices by becoming more efficient, then even the New Economy could be in for some trouble. DOUBLE WHAMMY. Up until now, most companies seem to be coping quite well by boosting worker productivity. But in what may be a harbinger of trouble, some companies are starting to experience tough times. ''Our earnings have fallen off a cliff this year,'' says James Tennant, CEO of Home Products International, a Chicago-based maker of plastic products. He pins the blame on oil-based resin prices, which have doubled in 12 months. Companies could face a double whammy if stiffer oil and other energy costs prompt workers to demand big pay boosts to make up for lost purchasing power. With the jobs market so tight, that threat can't be dismissed. So far, that doesn't seem to be happening. Workers have held off from pushing for sharply higher wages in part because they're convinced that inflation will stay tame. But that could change quickly if oil prices keep rising. And for the ever-anxious Fed chairman, that is more than enough reason for worry. By Rich Miller in Washington, with Robert Berner in Chicago _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					INTERACT E-Mail to Business Week Online

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