Greenspan Says There Are Signs Recession Is Coming to an End
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WASHINGTON -- Federal Reserve Chairman Alan Greenspan told Congress Wednesday that he sees increasing signs the country's first recession in a decade is coming to an end. But he cautioned the rebound this year is likely to be a subdued one.
Mr. Greenspan cited various signs of an improving economy in recent months, noting particular strength in such areas as consumer spending. He said these hopeful signals led Fed policy makers to call an end to their aggressive campaign of cutting short-term interest rates.
"In the past several months, increasing signs have emerged that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm," Mr. Greenspan told the House Financial Services Committee.
• Read the full text of Fed Chairman Greenspan's testimony.
Mr. Greenspan, delivering the Fed's semiannual economic forecast to Congress, said the central bank expects the economy this year will grow by 2.5% to 3% when measured from the fourth quarter of last year. That would represent about half the pace of the normal rebound from a recession.
Earlier Wednesday, an unexpectedly strong report on durable goods raised hope that the ailing manufacturing sector may finally be stabilizing. Orders for big-ticket items jumped 2.6%, the Commerce Department said.
But a separate report on the housing market revealed a surprisingly sharp drop in new-home sales for January. Sales tumbled 14.8% to the lowest level since June 2000.
Mr. Greenspan agreed with the view of many private forecasters that this recession probably will be "a significantly milder downturn" than others in the post-World War II period. He said this development was nothing short of remarkable, given the added shocks to the economy suffered with the Sept. 11 terrorist attacks.
"If ever a situation existed in which the fabric of business and consumer confidence both here and abroad, was vulnerable to being torn, the shock of Sept. 11 was surely it," Mr. Greenspan said.
Addressing the largest corporate bankruptcy in U.S. history, Greenspan said the collapse of energy giant Enron Corp. underscores how fragile companies can be when their main business rests not on the number of factories they own producing real goods but on the production of less tangible services, such as energy trading.
"The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation," Mr. Greenspan said. "Trust and reputation can vanish overnight. A factory cannot."
Mr. Greenspan said a sustained increase in business investment will be necessary to ensure an economic recovery. But the prospects for such investment are lackluster, and, he said, an increase "is likely to be only gradual."
He also said the near-term outlook for consumer spending, a key driving force of the economy, remains uncertain. He noted that though the economy appears poised to rebound, the soft labor market could cap spending.
Fed policy makers expect the unemployment rate, which reached 5.6% in January, to climb as high as 6.25% this year.
The Fed also expects inflation to remain low, partly because businesses are afraid to pass cost increases on to consumers. Policy makers now expect one key inflation gauge -- 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.
Mr. Greenspan's cautiously optimistic tone led many analysts to believe that the Fed is probably finished cutting interest rates, and will not feel any need to raise rates at least before the latter part of the year. That will mean the federal-funds rate, which the Fed pushed down to a 40-year low of 1.75% in a series of 11 aggressive rate cuts last year, is likely to stay unchanged for a significant period this year.
Updated February 27, 2002 11:26 a.m. EST |
