- The Washington Times - Monday, March 5, 2007

If you are looking for some perspective to understand the context of last Tuesday’s 416-point loss (3.3 percent) in the Dow Jones Industrial Average and the 50-point (3.5 percent) dip in the more broad-based Standard & Poor’s 500, consider these facts. It is true that the one-day correction in the S&P; 500 was the largest in four years. Far more astonishingly, as Sebastian Mallaby has noted, is the fact that Tuesday’s dip ended the longest period since the 1950s during which the S&P; 500 had not incurred a one-day 2 percent loss. Most important of all, however, when the dust cleared on Tuesday, the Dow (12,216) was still 55 percent higher than it was four years ago.

The S&P; 500 (1,399) was 67 percent higher. Also, following their 3-percent-plus corrections, the Dow and the S&P; 500 closed Tuesday 90 percent and 88 percent, respectively, above their levels on Dec. 5, 1996, when then-Federal Reserve Chairman Alan Greenspan warned about “irrational exuberance.” So, the correction last week, even if it proves to be the first installment, comes on the heels of a remarkable bull run on Wall Street.

Meanwhile, Mr. Greenspan has been the target of more than a few boos for comments he made via satellite to a business conference in Hong Kong the day before the worldwide stock-market correction, which began in China, whose Shanghai Stock Exchange plunged 8.8 percent. With the U.S. economy now in the sixth year of its expansion, Mr. Greenspan, according to Dow Jones news service, reasonably observed, “When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign.”

Amid a rising glut of unsold homes, residential investment has been plunging for three quarters. The intensifying problems in the “sub-prime” mortgage market recently appear to have become somewhat contagious. The manufacturing sector contracted in November and January, according to the Institute for Supply Management. The Jan. 31 “advance” report on gross domestic product revealed that business investment declined in the fourth quarter for the first time in nearly four years. As expected, the “preliminary” fourth-quarter GDP report, which was issued the day after the stock-market correction, ratcheted overall growth downward from 3.5 percent to 2.2 percent. Business investment fell more than initially reported. It was the third consecutive quarter that annualized growth was 2.6 percent or less. On the day the stock market fell, the government reported that durable-goods orders declined nearly 8 percent in January, exacerbating the business-investment downturn.

Mr. Greenspan merely said a recession by the end of 2007 was “possible,” after which the institute reported that manufacturing rebounded in February, when the service sector continued expanding. Let’s hope we are in the midst of the same kind of soft landing that Mr. Greenspan helped to engineer in 1995.

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