The Enigma Economy
In testimony before the House Budget Committee Friday, Federal Reserve Board Chairman Alan Greenspan expressed support for tax cuts, while another major U.S. company blamed dipping profits on a slowing economy.
Tech leader Oracle said that its third-quarter earnings will fall below forecasts because of a sudden slowdown in sales, reports CBS News Correspondent Jim Axelrod.
The company's stock tumbled 22 percent, rattling nerves on the Street.
"I think Oracle is a negative indicator for the rest of tech," said Rick Scherlund, a Goldman-Sachs analyst.
The recent parade of profit warnings pushed investors last month to reduce their mutual fund holdings for the first time in two-and-a-half years, pulling $13 billion out of those investments in February.
However, some analysts say the high-profile plunges of major stocks do not tell the whole story.
"The broader market has done rather well. If you'd been in health care or energy or food and beverages, you've done rather well," said Prudential stock-watcher Larry Wachtel. "Some groups do well. Some do poorly. It's just the sexy groups are not doing well."
The signals are certainly mixed: while consumer confidence surveys indicate high anxiety, vehicle sales remain robust and construction is at record levels.
"I would argue their actions speak louder than words," said Banc One's deputy chief economist, Diane Swonk. "They're buying things like cars and homes, which take an awful lot of confidence to buy, even though they say they are worried about the future."
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But the chairman warned the panel that the chances of a return to budget deficits as a result of poor fiscal policy were "not negligible."
"We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake," he said.
Previously, Greenspan for a number of years had repeatedly said that the No. 1 use of the budget surplus should be to reduce the national debt.
Greenspan explained the switch Friday by saying that the size of the surplus projections has grown so large that there is enough room to pay down the debt and provide a significant tax cut.
Greenspan, however, has refused to endorse a specific size for the tax cut, saying that decision should be left to Congress and the administration.
Similar remarks by Greenspan five weeks ago provided a major boost for President Bush's $1.6 trillion 10-year tax cut plan and left Democrats fuming that the Republican Greenspan was modifying his position to accommodate the new GOP administration.
But his comments were not a big help to stock markets Friday. While the Dow Jones industrial average edged up slightly — rising 16.17 points to 10,466.31 — the Nasdaq shed 3 percent of its value and 65.75 points to close at 2,117.63, while the Standard & Poor's 500 slid 7.05 points to finish the week at 1,234.18.
In addition to Oracle's warning, the gloom on Wall Street might be due to disappointment that Greenspan's statements this week didn't foreshadow another interest rate cut before the next regular Fed meeting, on March 20.
The Fed cut rates twice, by one-half percentage point each time, on Jan. 3 and Jan. 31, the first time in Greenspan's 13-year tenure at the central bank that rates have been reduced by a full percentage point in a single month.
Greenspan Friday defended the Fed's decision to delay cutting interest rates until January despite growing signs of an economic slowdown, rejecting the view of some critics that the dramatic slowdown occurred in part because the Fed botched monetary policy.
If the Fed had acted more quickly, it could have created more problems, Greenspan told the budget committee. Moving sooner, he said, risked "inducing far greater imbalances."
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