U.S. Economy: Greenspan Sees Rebound `Well Under Way'
from Bloomberg
By Michael McKee, Simon Kennedy, Siobhan Hughes and Monee Fields- White
Washington, March 7 (Bloomberg) -- The U.S. economy is rebounding from a recession that began a year ago, Federal Reserve Chairman Alan Greenspan said in a more positive assessment than he gave just one week earlier.
``Recent evidence increasingly suggests that an economic expansion is already well under way, although an array of influences unique to this business cycle seems likely to moderate its speed,'' Greenspan said to the Senate Banking Committee.
Greenspan told a House committee last week the economy was ``close to'' recovering from the first recession in a decade. Reports since then show manufacturing ended an 18-month slump last month, and consumers flocked to Wal-Mart Stores Inc. and Target Corp., pacing the biggest gain in retail sales in almost two years. Worker productivity surged 5.2 percent in the fourth quarter, the biggest gain since the middle of 2000.
Treasury note yields soared as investors took the testimony as a sign Fed policy makers will start raising interest rates by midyear to keep the economy from overheating. The 4 7/8 percent note maturing in February 2012 fell more than 1 1/4 point, pushing up its yield 17 basis points to 5.22 percent. A basis point is 0.01 percentage points.
Consumer borrowing rose by $12.9 billion in January, compared with a $1.8 billion increase in December, the Fed reported separately. It was the sixth consecutive rise, which includes a November gain of $20 billion that was the biggest jump in 60 years.
Retailer Sales
U.S. retailers' sales increased 6.2 percent in February, based on chain store data compiled by the bank of Tokyo-Mitsubishi Ltd. The monthly gain was the biggest in almost two years and received its biggest lift from a 10 percent sales jump at Wal- Mart.
Stocks nonetheless fell amid concern the recovery may not be strong enough to revive corporate profits. The Dow Jones Industrial Average fell by 49 points, or 0.5 percent, to close at 10,525.37. The Nasdaq Composite Index declined by 9 points, or 0.5 percent, to close at 1881.63.
Initial claims for unemployment insurance fell last week to 376,000 from 381,000 a week earlier, the Labor Department reported separately. Claims have been below 400,000 since the year began, the longest stretch since a five-year period ending in April 2001, when the recession was a month old.
The policy-setting Open Market Committee lowered the target rate for overnight loans between banks 11 times last year, and then left it at a 40-year low of 1.75 percent at the Jan. 30 meeting. At some point central bankers are likely to raise rates to keep inflation in check, Fed Bank of Philadelphia President Anthony Santomero said yesterday. He didn't specify when.
`Manage the Transition'
``The reality is they're trying to manage the transition from being an easing Fed to a Fed raising rates,'' said Diane Swonk, director of economics at Bank One Corp. in Chicago.
Central bankers meet again March 19.
Rising market rates suggest investors expect the Fed to raise the overnight rate at least as high as 2.75 percent by yearend, a full percentage point above the Fed's current target.
The jump in fourth-quarter productivity, reported by the Labor Department, showed the economy's resilience. The measure of how much work an employee performs in an hour had increased at a 1.1 percent rate in the third quarter, and hasn't declined at all since the recession began last March. Productivity fell during each of the four prior recessions.
Limited Inflation
The Commerce Department last week raised its estimate for gross domestic product, the measure of goods and services produced, to a 1.4 percent annual growth rate from a prior calculation of 0.2 percent. That led to the change in productivity numbers. The economy probably grew at a 3 percent rate in the first quarter, based on the median of 16 forecasts in a Bloomberg News survey.
The Philadelphia Fed's Santomero said yesterday that the ``continued diffusion of new technologies through the economy'' will keep productivity growing at 2 percent to 3 percent annual rates. With 1 percent annual growth in the labor force, the economy can then expand 3 percent to 4 percent a year without aggravating inflation, he said.
Other Signs of Strength
While Greenspan said the fourth-quarter productivity rate was ``suspiciously too strong,'' the number still confirms that advances in information technology, management and quality control have increased the ability of U.S. business to weather contractions, he said. Productivity gains improve living standards by making more goods and conveniences available to people without triggering higher prices.
Reports since Greenspan's Feb. 27 speech also show manufacturing grew in February for the first time in 19 months, and the rest of the economy grew at the fastest pace in 15 months. Factory orders rose in January for the second consecutive month, and retail spending increased.
Unit labor costs, or the amount paid for each unit of production, fell at a 2.7 percent annual rate in the fourth quarter, the first decline in two years, the productivity report showed. Those costs rose at a 2.6 percent pace in the third quarter.
Analysts had expected a 4.5 percent rate of productivity growth and a 2 percent drop in unit labor costs, based on the median of 58 forecasts in a Bloomberg News survey.
After languishing at a 1.4 percent annual growth rate from 1976-1995, productivity grew at an average 2.5 percent pace during 1996-2000 as the economy boomed and investments in computers, the Internet and other technology paid off.
The 1.9 percent gain in productivity last year suggests that elevated productivity gains may continue in coming years.
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