Last month's news that the economy grew 2.3 percent in the second quarter made some economists jump for joy. But former Federal Reserve Chairman Alan Greenspan wasn't too impressed.
"[The economy] is extraordinarily sluggish," he told Fox Business Network.
"It's fundamentally being suppressed by a very low increase in productivity, in fact, close to zero, and you can't get more than a 2 percent growth rate out of those numbers," he said.
Indeed, the Atlanta Fed's forecasting model puts third-quarter growth at only 1.3 percent. As for productivity, it rose at an annualized rate of just 1.3 percent in the second quarter, after falling 1.1 percent in the first quarter.
“The basic problem is that we are not getting any capital investment that significantly adds to the growth of output per hour,” he stated.
And there are other problems, he adds.
“Entitlements have been growing under the administrations of Republicans and Democrats close to 10% a year for a half century,” he noted. “We’re finally at a point where it is, essentially, crowding out.”
So why hasn't the Fed's massive easing program boosted the economy more? "The basic problem is that we're not getting any capital investment that significantly adds to the growth in output per hour," Greenspan said.
"The best way of looking at this whole process is the fact that the sum of gross domestic savings and entitlements has been a constant relative to GDP for 50 years. That means for every dollar increase in entitlements, you lose a dollar of savings."
And that has left the market at a fragile turning point.
“Whether it’s the Fed moving or the market moving itself, bond prices fall, you begin to get very significant downward pressure on stock prices,” Greenspan explained.
“There’s where the real problem lies as far as equities are concerned, is that it cannot be dissociated from the fact that interest rates are historically too low and will have to move higher eventually,” he said.
“We tend to think of stock market bubbles as very substantial price earnings ratios. Well, if you turn the bond market around and you look at the price of bonds relative to the interest received by those bonds, that looks very much like the usual spread which would concern us if it were equities, and we should be concerned.”
Elsewhere on the economic front, the U.S. economy historically suffers a recession every five to eight years, so given that our recovery is more than six years old, we may face a downturn soon.
And with monetary policy already in heavy-easing mode and fiscal policy hamstrung by the government's massive debt burden, the government's tools to combat any downturn are limited.
"As the U.S. economic expansion ages and clouds gather overseas, policy makers worry about recession," write Wall Street Journal reporters Jon Hilsenrath and Nick Timiraos.
"Their concern isn’t that a downturn is imminent, but whether they will have firepower to fight back when one does arrive."
The Federal Reserve's target rate for federal funds now stands at a record low of zero to 0.25 percent. And while the central bank is expected to start raising rates soon, many economists expect the rate to top out at 2 percent, and not until late 2016 or 2017. That leaves little room to cut rates if necessary.
On the fiscal side, federal government debt has soared to 74 percent of GDP from 39 percent in 2008. That leaves little room for higher spending and/or lower taxes.
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