Greenspan Whistles A Happy Tune

Alan Greenspan Federal Reserve
Federal Reserve Chairman Alan Greenspan told Congress on Thursday that he saw a number of encouraging signs that the first U.S. recession in a decade may be coming to an end.

"There have been signs recently 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 prepared remarks.

In a related development, the White House said it expects the economy to show modest growth in the first quarter of 2002 followed by robust growth in the second half, a top administration official said.

"First quarter GDP growth would be quite modest. Second quarter GDP growth a little bit more robust, and then very robust in third and fourth quarters," Glenn Hubbard, chairman of the White House's Council of Economic Advisers, said after a closed-door meeting with lawmakers.

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Greenspan's testimony before the Senate Budget Committee struck a tone noticeably more upbeat than his much-debated speech in San Francisco on Jan. 11 which initially led markets to expect a quarter-point interest rate reduction.

Fed officials in recent days have tried to steer investors toward the view that the U.S. central bank might stand pat when it meets next week. Many economists have been forecasting that the Fed will indeed stand pat when it meets next week.

Greenspan also sought to defend his policy switch of a year ago, when he came out in favor of large tax cuts given the prospect at the time of a 10-year budget surplus in excess of $5 trillion.

Greenspan noted that the Congressional Budget Office has trimmed its surplus estimate by $4 trillion. But he said the prospect of $1.6 trillion in surpluses over the next decade still represented a budget picture that was "considerably stronger" than a decade ago.

There had been publised reports that Greenspan believed that Wall Street had reacted to his Jan. 11 speech too negatively, ignoring the positive signs he had also noted of a pending economic rebound.

In his remarks to Congress, Greenspan did not repeat worries about "significant risks," though he did mention factors that could dampen economic growth. However, he chose to focus on the various indications that the economy has begun to stabilize.

He noted that consumer spending, especially for autos and cars, had remained strong, and he said that there were signs that the huge wave of layoffs following the Sept. 11 terrorist attacks had started to abate, given a drop in weekly claims for unemployment benefits.

"Over the past month or so ... initial claims for unemployment insurance have decreased markedly, on balance, suggesting some abatement in the rate of job loss," Greenspan said.

But he cautioned that even with the improvement in weekly jobless claims, the overall unemployment rate could continue to rise for a time even after the economy begins growing again as businesses wait to see if the rebound is sustainable before hiring new workers.

Before Greenspan spoke, the Labor Department reported Thursday that new claims for benefits dropped last week by 15,000 to 376,000, the lowest level in six months.

Greenspan also said that the big reduction in the overhang of unsold business goods in recent months was setting the stage for a pickup in industrial production, which has been falling for more than a year.

The Fed chairman said that the various growing signs of an improving economy should bolster business confidence and help support a return to higher business investment spending. It was cutbacks in business investment that helped trigger the current downturn.

"If the recent more-favorable economic developments continue and gather momentum, uncertainties will diminish, risk premiums will fall and the pace of capital investment ... will increase," Greenspan said.

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