Greenspan Says U.S. Economy `Close to Turning Point'
from Bloomberg
By Michael McKee and Brendan Murray
Washington, Feb. 27 (Bloomberg) -- The U.S. economy is ``close to a turning point,'' and should begin growing at a slower pace than after previous recessions, Federal Reserve Chairman Alan Greenspan said.
The consensus of the 17 members of the Fed's policy making Open Market Committee is that the economy, which entered recession in March, probably will grow 2 1/2 percent to 3 percent during 2002.
``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,'' Greenspan said in the text of testimony to the House Financial Services Committee.
``An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery,'' he said.
Treasury securities rose after release of Greenspan's testimony, which suggested to investors that the Fed may keep interest rates low for some time. The 4 7/8 percent note maturing in February 2012 rose 3/8 point, pushing down its yield 4 basis points to 4.88 percent. A basis point is equal to 0.01 percentage point.
Greenspan's remarks suggest central bankers ``have no compelling reason to raise rates at this point and may not for many months,'' said Steve Slifer, chief economist at Lehman Brothers Inc. in New York.
Similar to Jan. 24
Offering much the same assessment of the economy as he provided in testimony to the Senate Banking Committee on Jan. 24, the Fed Chairman said the central bank's ``aggressive'' series of 11 reductions in the benchmark overnight bank lending rate, to a 40-year low of 1.75 percent, has helped the economy begin to rebound, as has success in the war against terrorism.
Low mortgage rates, which ``should continue to underpin activity,'' and ``favorable weather'' have boosted home sales and mortgage refinancing. That, in turn, has given consumers more money to spend, Greenspan said.
As a result, spending has ``advanced at a solid pace'' in recent months, particularly in ``surprisingly resilient'' auto sales. Falling prices for natural gas, fuel oil and gasoline also enabled Americans to maintain their spending, he said.
Labor markets are improving, Greenspan said. Job cuts have ``diminished noticeably,'' and as a result, first-time claims for unemployment insurance have ``decreased markedly.''
`Repayment Difficulties'
While consumers' debt levels have risen in recent months, and ``repayment difficulties have already increased,'' particularly among low-income borrowers, consumer credit concerns don't appear to pose a ``major impediment'' to the recovery, he said.
Still, Fed officials see only a ``moderate expansion of consumption spending'' over the next few quarters. Spending didn't slow during the current recession as much as it had in previous slumps, Greenspan said.
``Although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles,'' he said.
As a result, the strength of the recovery will be driven by how rapidly business investment picks up, and there the picture is more mixed, the Fed chairman said.
Companies spent so much money preparing for Y2K and on the Internet boom of 1999 and 2000 that growth ``doubtless'' will not return to those levels, he said.
There are signs investment is growing for semiconductors, computers and other technology equipment. Spending on telecommunications equipment is still contracting and investment in other industries such as aircraft manufacturing, ``will presumably remain weak this year,'' he said.
`Gradual' Recovery
``The recovery in overall spending on business fixed investment is likely to be only gradual,'' he said. ``In particular, is growth will doubtless be less frenetic than in 1999 and early 2000.''
Companies will invest more if they see the economy improving, he said.
``If the recent, more favorable economic developments gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment embodying new technologies will increase,'' Greenspan said.
The Fed chairman called the collapse of energy trader Enron Corp. a sign of new vulnerabilities in the economy.
``A firm is inherently fragile if its value added emanates more from conceptual as distinct from physical assets,'' he said. ``The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation.''
Inflation
Companies with relatively few physical assets are susceptible to sharper losses in investor confidence when ``managers of such facilities falls under a cloud,'' he said. ``Trust and reputation can vanish overnight; factories cannot.''
Greenspan suggested that more scrutiny should be given to firms' use of derivatives.
``Derivatives have provided greater flexibility to our financial system,'' he said. ``But their very complexity could leave counterparties vulnerable to significant risk that they do not currently recognize, and hence, these instruments potentially expose the overall system if mistakes are large.''
In Enron's case, ``the market's reaction to the revelations about Enron provides encouragement that the force of market discipline can be counted on over time,'' he said.
Fed Forecasts
The Fed expects the personal consumption price index -- an inflation measure tied to gross domestic product -- to rise by 1.5 percent and the unemployment rate to rise over the next year to ``the area of'' 6 percent to 6.25 percent.
``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.
The economy last year expanded 1.1 percent, the weakest growth rate since 1991, the Commerce Department said last month. In the fourth quarter, the annual growth rate was 0.2 percent, a figure analysts expect will be revised upward to 0.9 percent in a Commerce report tomorrow.
``If the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect,'' Greenspan said.
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Best Regards, J.T. |
