*Greenspan Sees Weaker US Economic Recovery Than In Past
DOW JONES NEWSWIRES
By Joseph Rebello and Deborah Lagomarsino
Of DOW JONES NEWSWIRES
WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Wednesday that the U.S. economic rebound this year is likely to be slightly weaker than Wall Street expects because the recovery may be restrained by a lack of consumer demand, industrial overcapacity and skittish U.S. financial markets.
Delivering a twice-yearly report on monetary policy to Congress, Greenspan moved to damp speculation in financial markets that the economic recovery might prompt the Fed to start raising interest rates as early as June. The recovery, he said, isn't generating inflationary pressures that would worry Fed policymakers.
"Certain factors, such as the lack of pent-up demand in the consumer sector, significant levels of excess capacity in a number of industries, weakness and financial fragility in some key international trading partners, and persistent caution in financial markets at home, seem likely to restrain the near-term performance of the economy," Greenspan told the House Financial Services Committee in prepared remarks.
Greenspan said Fed policymakers expect the economy to grow just 2.5% to 3% this year. That's slightly below the estimate of 3% to 3.25% the Fed made just seven months ago, and below Wall Street estimates of about 3% growth between the fourth quarter of 2001 and the fourth quarter of 2002. Greenspan said the growth also signifies a weaker recovery than the U.S. has been accustomed to after recent recessions.
Greenspan said recent economic data have indicated that the economy is rebounding. Businesses have whittled down inventories and should start making orders for new goods soon. Low mortgage rates have stimulated home sales, and consumer spending has been boosted by motor-vehicle sales. In addition, he said, falling energy prices have "clearly provided some support to disposable income and spending."
But he said a sustained increase in business investment is also necessary to ensure an economic recovery. The prospects for business investment, however, are lackluster, he said. "On balance, the recovery in overall spending on business fixed investment is likely to be only gradual," he said.
The near-term outlook for consumer spending, moreover, remains uncertain, Greenspan said. "Even if the economy is on the road to recovery, the unemployment rate, in typical cyclical fashion, may resume its increase for a time, and a soft labor market could put something of a damper on consumer spending." He said Fed policymakers expect the unemployment rate, 5.6% last month, to climb as high as 6.25% this year.
Greenspan said the Fed expects inflation to remain low under the circumstances, partly because businesses lack the ability to raise prices. "In this low-inflation environment, firms have perceived very little ability to pass cost increases on to customers," he said. Moreover, the soft jobs market will hold wage inflation in check. Fed policymakers, he said, expect one gauge of inflation - the price index for personal consumption expenditures - to show an increase of 1.5%, well below the range of 1.75% to 2.5 the Fed initially expected.
Greenspan said that although the collapse of Enron Corp. has ruffled U.S. financial markets, it is encouraging that the failure "barely registered" in natural-gas and electricity markets. "The market's reaction to the revelations about Enron provides encouragement that the force of market discipline can be counted on over time to foster much greater transparency and increased clarity and completeness in the accounting treatment of derivatives," he said.
He said the U.S. economy is less vulnerable to the risk of a credit crunch than it used to be. "Shocks to the overall economic system are...less likely to create cascading credit failure," he said.
-By Joseph Rebello and Deborah Lagomarsino, Dow Jones Newswires; 202-862-927949; joseph.rebello@dowjones.com
Updated February 27, 2002 10:03 a.m. EST |
