Fed Chief Calls It a Downturn, Not a Recession

Federal Reserve Board Chairman Alan Greenspan conceded Wednesday that the economy has entered a “meaningful downturn” but he stuck with his longstanding refusal to declare that the nation has plunged into a recession.

Appearing before the House Banking, Finance and Urban Affairs Committee, Greenspan said that the economy clearly weakened in October and November, in response to soaring oil prices and a worsening credit crunch. But he insisted that it is still too early to tell whether the slide will turn out to be a recession.

“No matter how you define a recession, we won’t know whether this is a recession or just a (temporary) aberration for quite a while,” he said.

Greenspan said it appears that the nation’s economy may be stronger than some private economists have been asserting, a view that could dampen expectations of further Fed action to reduce interest rates in the near term.

His comments came as the Commerce Department reported that the nation’s economic output rose at a revised annual rate of 1.7% during the third quarter, a relatively healthy rate that was a scant 0.1% below earlier estimates.

The agency also reported that new orders for durable goods--a key indicator of future economic growth--jumped 3.6% in October, the largest increase in five months. The jump reflected a surge in aircraft orders, which more than offset sharply reduced orders of defense-related goods.

Greenspan described the current downturn as “a gradual decline” that could cause the economy to contract during the fourth quarter if it continues. Economists technically define a recession as two consecutive quarterly declines in the gross national product, the measure of the nation’s total output of goods and services.

If oil prices had not soared as a result of Iraq’s Aug. 2 invasion of Kuwait, the economy could have avoided a recession altogether, Greenspan said.

“The data that we have received during the past four months indicate that, prior to Aug. 2, the economy was expanding at a moderate pace and underlying inflation pressures probably were beginning to ease,” Greenspan said.

Now, however, the economy presents “a mixed case,” Greenspan said. “But it’s clear that as of a week ago, our economy was still easing.”

In separate remarks, White House Press Secretary Marlin Fitzwater said that the Bush Administration believes the economy has entered a “slowdown” but not a recession. Like Greenspan, the President and his economic policy-makers have refused to characterize the slump as a recession.

Greenspan cited recent economic statistics, particularly the sharp increase in durable goods orders as well as higher auto sales reported earlier in the week, as evidence that the economy may be healthier than many economists apparently believe.

Greenspan said that he has detected a widespread sense of pessimism among economists, business leaders and consumers about the outlook for the economy and he suggested that the gloomy assessments are not warranted by the available evidence.

“The world out there is not in as bad shape as it feels,” Greenspan said. “If the people are right about how bad things are, then we shouldn’t be seeing these kinds of (statistics). And it is not clear that it will get as bad as people think it will get.”

Greenspan’s views, if shared by other Fed policy-makers, could indicate that the central bank does not feel under pressure to ease interest rates much further than it already has in recent weeks.

Most analysts had been expecting the central bank to push interest rates lower at least one more time before the end of the year. But Fed officials have been reluctant to move quickly because additional reductions could fuel inflation.

Greenspan declined to respond when asked specifically by congressmen at the hearing whether interest rates would be coming down.

But the Fed chairman freely acknowledged that he is concerned about the credit crunch in the nation’s banking system. He said that the crunch, combined with the oil shock and the uncertainties surrounding the Persian Gulf crisis, are working in tandem to generate pessimism and a “greater suppression of economic activity” than they might have inflicted separately.

In an effort to ease the credit crunch, Greenspan confirmed earlier reports that the Fed is studying the possible elimination of the reserve requirements that banks must meet on certain types of large certificates of deposit.

The Fed chairman said also that he believes the United States could withstand a brief war with Iraq without seriously damaging the economy or drastically increasing the federal budget deficit. Since the military crisis in the Persian Gulf has come at a time when the defense buildup of the Ronald Reagan Administration is “unwinding,” Greenspan said, total defense spending should continue to decline even if there is a brief war.

“None of the likely scenarios suggest to me that we will have a bulge in defense expenditures, so the trend in the budget deficit will not be significantly different from what was laid out in the budget agreement,” Greenspan said.

Greenspan said he believes that international economic sanctions have had a significant impact on Iraq. But he declined to say whether he thinks the United States would be better off waiting for the sanctions to work rather than embarking quickly on a military offensive.