Outlook: Alan Greenspan

SINCE ALAN Greenspan first referred to "irrational exuberance" in December 1996, the Dow has risen by nearly 80 per cent. The Fed chairman had another go yesterday, politely suggesting the elevated level of share prices in the US was "unwarranted" and perhaps even "euphoric".

The point he was making was two-fold: first, that gains in share prices had gone well beyond what was justified by the very real improvements in US productivity; and second, that productivity growth could not carry on accelerating.

Ardent free-marketeer that he is, Mr Greenspan was tentative on the extent of the share price bubble. As he put it, for a central bank to identify a bubble involves "pitting its own assessment of fundamentals against the combined judgement of millions of investors". However, his second point concerns a matter of arithmetic rather than judgement. For the long- term growth rate of corporate profits to increase, as required to justify continuing stockmarket gains, productivity growth too must continue to pick up. Once it stabilises, unit costs will start to increase more rapidly.

Productivity in the US economy has accelerated remarkably, from a lacklustre 1 per cent a year in the 1980s to more than 2 per cent in the 1990s and 2.5 per cent in the past couple of years. Mr Greenspan argues it is reasonable to attribute this to the implementation of new technologies across the economy. But can the improvement continue?

History urges caution, he rightly points out. Do investors agree with him? Do they hell. The extraordinary euphoria across the Atlantic suggests American investors are still inclined to believe that history is bunk. It will take more than Mr Greenspan's measured warning to deflate them.