NEW YORK – When Federal Reserve Chairman Alan Greenspan takes the podium Wednesday to brief Congress on the state of the U.S. economy, Wall Street will see a glass both half-empty and half-full.
The seeds of recovery have taken deeper root since the Fed chief updated the nation a month ago, but so has anxiety that accounting skeletons in Corporate America's closets could depress business investment needed to sustain a rebound.
Greenspan's semi-annual testimony to Congress is always a marquee event for financial markets. But Wall Street will parse his famously opaque words especially closely after he appeared to swing from cautiously downbeat to guardedly upbeat in twin January speeches.
His balancing act, analysts say, will be to temper optimism over a brightening outlook with a laundry list of risks to keep financial markets from seizing on his remarks as an excuse to drive long-term U.S. interest rates higher.
At the same time, Wall Street is eager to hear Greenspan's prognosis on "Enronitis": Does he think the accounting issues raised by Enron Corp.'s collapse are limited to a handful of firms, or symptom of a deeper ailment that can raise corporate borrowing costs?
"His views are likely to be more optimistic on the economy than they were in his last speech, but you would expect he will play up the risks of a subpar recovery," said Jade Zelnik, chief economist at Greenwich Capital Markets.
"The Enron problems have made access to capital markets generally more difficult for firms. That could translate into more caution for capital spending," Zelnik said. "But I think he will want to be reassuring on that count. I don't think it would be in Greenspan's interest to seem panicked."
"UNUSUAL FORCES" CONTINUE TO ABATE...
Greenspan said on Jan. 24 that some of the economy's vital signs had improved, with lean U.S. inventories setting the stage for higher production, lower energy costs boosting disposable incomes and consumer spending holding up well.
Those trends have strengthened in recent weeks, led by surprisingly robust consumer spending. Existing home sales surged more than 16 percent to a record pace in January, and retail sales, excluding automobiles, spiked 1.2 percent last month and were stronger than initially reported in December.
Such solid activity has interest rate futures markets convinced the Fed will raise rates from 40-year lows by mid-year -- with a small chance of a rate hike before then -- as a building recovery raises the odds of future inflation.
Wall Street analysts say Greenspan may not wish to encourage that enthusiasm. An overly bullish speech could send bond prices falling and yields rising, prematurely putting upward pressure on the cost of loans on cars, homes and other big-ticket items.
"Generally he is going to have an optimistic tone. But his aim is certainly not to impose more tightening in the marketplace at this juncture," said Alan Ruskin, research director at 4Cast Inc., a markets research firm.
"He can say 'I am optimistic, but at the same time we don't see inflationary forces taking hold'. He can coat the recovery story with a color that is much more muted," Ruskin said.
...BUT FINAL DEMAND HOLDS THE KEY
Greenspan last month said the key to a sustained recovery hinged on whether final demand from consumers and businesses was strong enough to carry the economy forward after firms rebuild their inventories.
Because consumer activity has remained robust, the Fed chief said that growth would largely have to come from a pickup in corporate profits and business investment.
On that point, analysts said, Greenspan may choose to weigh in on Enron fallout.
Concerns over cooked corporate books have been impairing the access of many firms to capital markets.
In the corporate bond market, for example, the difference in yield between bonds from lower investment-grade industrial companies and those with "triple-A" ratings mushroomed to 1.94 percentage points on Feb. 20 from an average 1.62 percentage points in January, according to data from Moody's Investors Service.
A number of companies have also found it difficult to raise money by selling short-term commercial paper, and banks have tightened lending standards.
"The toll Enronitis has taken on shareholder wealth and the financial fortunes of some major companies must have reinforced his (Greenspan's) concerns that final demand will not gather sufficient strength to sustain growth at a good pace after the inventory swing has done its work," Peter Hooper, chief U.S. economist at Deutsche Bank, wrote in a research report.
But Hooper said Greenspan may have to lay some groundwork for a future shift in the Fed's stance from one in which the economy remains at risk of deeper economic weakness to one in which the risk of weakness and inflation are in balance.
"All in all, Chairman Greenspan faces a delicate task," he said. And bearing in mind how markets were rattled by a Jan. 11 speech which was interpreted as bleak, he said: "We can be sure his words will be chosen especially carefully."