Fed's Ferguson Sees Uncertainty In Business Spending
DOW JONES NEWSWIRES
WASHINGTON -- While the overall U.S. economy is showing signs of initial recovery, it's unclear whether business investment is picking up, Federal Reserve Vice Chairman Roger Ferguson said Wednesday.
Steady household spending has been a key stabilizing factor in the recession, but the recent pattern of business investment is inconclusive, Ferguson said in prepared remarks to the Canton Forum Speakers Series in Canton, Ohio.
In his prepared text, Ferguson said the Federal Reserve will maintain policies that foster price stability and sustainable growth, but he didn't comment further on the Fed's future monetary policy.
"Until there is a clearer perspective with regard to business investment, I believe there is still reason for some reservations regarding the contours of the recovery," he said.
After a year of dealing with excess capital goods, firms are being cautious in their spending and many report their expansion plans are on hold, Ferguson said. But rapid liquidation of inventories in the fourth quarter suggests downward stock adjustments are "well along in most industries," he said.
Ferguson said capital investments that reduce costs may be more attractive to firms and cited better spending indicators in the past few months for computer equipment.
Last year's slowdown was unusual both in the earliness and severity of the business spending decline and, by contrast, the strength of household spending, Ferguson said.
"In the past 50 years, (capital) investment spending has nearly always begun its decline one to four quarters after the peak of the economic cycle, not before it," he said.
Though business investment dropped amid the technology sector's shakeout, consumer spending on goods and services - which accounts for two-thirds of gross domestic product - held up "remarkably well" throughout the year, Ferguson said.
"At this point, it is still too early to classify this recession as mild or severe," he said.
While economists believe improved technologies over the past 15 to 20 years have been taming economic fluctuations, "because of the unusual, investment-led nature of this recession, we cannot put too much weight on the shape and profile of past recoveries in trying to predict this one," Ferguson said.
Longer term, the U.S. economy is strong with a well-educated workforce, a healthy banking system and flexible capital markets well equipped for shocks, the vice chairman said.
"Productivity growth continued over the four quarters of 2001," he said. "That increase is impressive, given the historical tendency of productivity growth to turn negative when the economy enters recession."
Productivity gains since the mid-1990s are "largely structural and will persist for a time," Ferguson said. "I do not believe that the terrorism of last fall is going to permanently harm increases in output per hour."
While resources may have shifted from efficiency measures toward security and supply redundancy, "these effects will be mainly a one-time hit to the level of productivity," he said.
Ferguson reiterated the Federal Reserve's forecast for U.S. GDP growth of 2.5% to 3.0% this year. He said the Fed's liquidity injection and sharp reduction in interest rates last year have buoyed the economy by spurring residential construction and other housing investment, lowering credit card and mortgage payments, keeping credit available to companies and encouraging automobile sales.
-By Campion Walsh, Dow Jones Newswires; 202-862-9291; campion.walsh@dowjones.com
Updated February 27, 2002 12:53 p.m. EST |
