Fed Gloomy on Economy : Greenspan Says Oil Hikes, Tight Credit Take Toll

Federal Reserve Chairman Alan Greenspan, all but declaring the nation in a recession, said today that skyrocketing oil prices and a growing shortage of credit have substantially weakened the economy.

“All indications are that a meaningful downturn in aggregate output occurred as we moved through October into November,” Greenspan told the House Banking Committee.

In response to a question from Rep. Charles E. Schumer (D-N.Y.), Greenspan said it was too soon to determine whether the country is experiencing a recession, but he conceded that economic growth, as measured by the gross national product, probably will turn negative in the October-December quarter.

“This seems to me to be a nice way of saying we’ve entered a recession,” said Schumer.

The central bank chief said oil prices, which have risen from $20 a barrel before the Iraqi invasion of Kuwait on Aug. 2 to $33 now, are cutting into the spending power of both businesses and consumers.

He said the clearest manifestation of the oil shock is in the labor market, where “private employment and hours of work dropped markedly in October.”

“The drop in employment and hours is causing personal income to decline at the very time that rising energy prices are squeezing many household budgets. This drop in real purchasing power, along with plunging consumer sentiment, does not bode well for the near-term trends in consumer demand,” he said.

Although world oil supplies have rebounded to what Greenspan described as “comfortable” levels, he said uncertainty about what will happen in the Persian Gulf is keeping the price of oil high and is causing consumers and businesses to hold off on purchases in general.

Greenspan also said the so-called “credit crunch,” which he first publicly noted in July, “has proceeded somewhat further.”

“The available anecdotal information clearly suggests that many types of businesses are encountering greater difficulty obtaining financing,” he said.

The central bank chairman confirmed that the Fed has moved in recent weeks to cut interest rates in an effort to stimulate the economy.

And he said, “I can only offer the assurance that the Federal Reserve will seek, as we have in the past, to foster economic stability and sustainable growth.”

However, he cautioned, “There is no policy initiative that can in the end prevent the transfer of wealth, and cut in our standard of living, that stems from higher prices for imported oil.”

The government reported today that the U.S. economy grew at a 1.7% annual rate in the third quarter.