War Called a Factor in U.S. Downturn : Economy: Uncertainty over gulf outcome is a key element, the Fed chairman says. But there are signs of recovery.

Federal Reserve Chairman Alan Greenspan today said that the Persian Gulf War is “a key factor” in the nation’s economic downturn but that signs of recovery are already emerging.

“The damage from the Persian Gulf crisis went beyond the direct effect of higher oil prices,” Greenspan told the House Budget Committee.

“Indeed, the enormous uncertainty about how, and when, it would be resolved contributed to a marked erosion of consumer and business confidence about prospects for the economy,” he said.

“I anticipate that the economic forecasts of the Congressional Budget Office and the Administration will show declines in real GNP in both the fourth quarter of 1990 and the first quarter of 1991,” he said. The common shorthand definition of recession is two consecutive quarters of decline in the gross national product.

Greenspan said the war’s effect on oil prices is “a key factor” in the economic slump, with higher oil prices cutting into the spending of households and businesses.

“All indications are that business activity declined appreciably in the fourth quarter of 1990. . . . The contraction apparently continued in December,” he said.

However, he added, “as best we can judge, the latest data contain some hints that the effects of the initial shock last August have largely worked their way through the system and that the downward pressures on activity may be lessening.”

Greenspan noted that in midsummer the central bank resumed nudging interest rates lower to strengthen the economy, and he said it would continue as needed.

“We expect that our actions to date will provide support to economic activity in the quarters ahead. Whether further adjustments to policy will be needed is not known. . . . In that regard, we shall want to make certain that money and credit remain on suitable growth tracks,” he said.

He said, however, that the Federal Reserve will not overdo the relaxation of monetary policy.

“We must take care to avoid a policy that is overly stimulative. The amount of slack in the economy is not great by historical standards, and an overly aggressive monetary easing could end up being counterproductive,” he said.

Many private economists expect that a short war in the gulf would help the economy by lowering oil prices and removing uncertainties.