Greenspan Sees Modest Upturn for Economy

In his most upbeat economic assessment in months, Federal Reserve Board Chairman Alan Greenspan told members of Congress on Wednesday that he foresees a moderate recovery starting this spring, combined with the lowest rate of inflation in a generation.

Although America’s recession-scarred economy remains troubled and unemployment is likely to hover close to 7% all year, Greenspan said, growth should resume in response to lower interest rates and sharply reduced levels of household and business debt.

Greenspan’s remarks coincided with government reports that housing starts jumped 5.5% in January, strengthening hopes for a modest rebound by midyear, and that consumer prices rose a scant 0.1%, suggesting that inflation remains under control.

“We are beginning to see stirrings,” Greenspan said in testimony before a subcommittee of the House Banking Committee. “It could just as easily peter out as the much more vigorous recovery last spring petered out . . . “ but “we expect some modest quickening in economic activity as the year progresses.”

As evidence of a recovery in the making, Greenspan pointed to the increasing signs of life in the nation’s home-building sector, which has led the nation out of past recessions. He also cited recent improvements in factory orders and backlogs.

Despite his optimism, the Federal Reserve Board’s semiannual report on economic conditions and monetary policy said the impact of recent layoffs and low consumer confidence are likely to restrain growth in the next few months.

Rep. Charles E. Schumer (D-N.Y.), noting that the White House always welcomes good economic news in an election year, urged Greenspan to resist any attempts by the Bush Administration to seek sharply lower interest rates before the November elections.

“Your statement is more sunny than you have issued for a while, but I’m sure there’s gloom and doom in the White House today,” Schumer said, referring to President Bush’s showing in the New Hampshire primary against GOP challenger Patrick J. Buchanan.

But Rep. Lee H. Hamilton (D-Ind.), former chairman of the Joint Economic Committee, said he would rather see another Fed move to cut interest rates than a poorly designed package of anti-recession tax cuts. Bush has sent a tax-cut package to Capitol Hill for quick passage, and House Democrats are trying to devise their own economic growth plan.

Greenspan said a Democrat-sponsored middle-income tax cut financed by tax hikes targeted at wealthy Americans would provide a negligible boost to the economy. He said it would be better for Congress to adopt legislation spurring long-term growth and investment.

In their report to Congress, Greenspan and the other Federal Reserve Board governors said they believe that they have done enough already to lower interest rates but will keep a close eye on developments and be prepared to act if the economy falters again.

“The early indications of a marked pickup in residential real estate activity and a rise in retail sales are a particularly favorable sign,” the report said. “The most likely outcome is for a moderate re-acceleration of activity over 1992.”

The Fed report predicts that the economy will expand at an annual rate of 1.75% to 2.5% this year, in line with estimates by the Bush Administration and many private economists. Although that would be an improvement over last year’s 0.2% growth, it would fall far short of the average 6% expansion experienced after most recessions since World War II.

Since employers are likely to be cautious about hiring, the Fed report said, the nation’s jobless rate is expected to decline only slightly from the December level of 7.1% to a projected rate of 6.75% by the end of the year.

The Federal Reserve Board predicted that consumer inflation would average a moderate 3% to 3.5% in 1992--about the same as last year. But the central bank noted that basic price trends appear even more favorable.

“There are clear signals that core inflation rates are falling, implying the prospect that within the foreseeable future we will have attained the lowest rates of inflation in a generation, an encouraging indicator of future gains in standards of living for the American people,” Greenspan said.

Even so, Greenspan acknowledged that the economic outlook remains unusually uncertain because any sustained improvement will depend on a change in consumer psychology that is very difficult to predict.

The Fed has elected to pursue a steady course rather than tighten or ease monetary policy at this time. Greenspan noted, however, that the Fed, in a move to encourage bank lending and spur the economy, acted Tuesday to lower from 12% to 10% the amount of checking-account deposits that banks must set aside to offset possible loan losses.

The Commerce Department report on January housing starts bolstered hopes that the depressed construction industry would spark a recovery this year.

The 5.5% rise in starts on new homes and apartments was the biggest monthly increase in nearly two years.

A week ago, the National Assn. of Realtors reported that sales of existing homes climbed 4.7% in the last quarter of 1991 in response to lower borrowing costs.

In a separate report, the Labor Department said a drop in energy and food costs limited the rise in the consumer price index last month to 0.1%, the smallest increase since an identical gain last July.

The consumer price report suggests that a series of interest rate reductions engineered by the Fed in recent months have not rekindled inflationary pressures and that the central bank can afford to keep interest rates low in an effort to stimulate the economy.

In citing the reasons for his increasing optimism, Greenspan said it appears that American consumers and businesses are reducing their debt at a rapid rate.

What Greenspan Foresees

Federal Reserve Chairman Alan Greenspan told Congress that interest rate cuts and a reduction in business and household debts should guarantee sustained recovery in the economy.

The Fed’s Economic Forecast

Gross Domestic Product: The economy will rise at an annual rate of between 1.75% and 2.5% this year. That compares with a 0.2% gain for 1991.

Inflation: Consumer prices will rise between 3% and 3.5% this year. The Labor Department reported Wednesday that consumer prices rose 0.1% in January, reflecting decreases in energy and food costs. A second report showed housing starts rising 5.5%.

Money: Greenspan stressed that the Fed must guard against supplying so much money to banks that it jeopardizes the gains made in reducing inflation. On Tuesday, the Fed said it was cutting the amount of checking-account deposits that banks are required to hold as reserves, freeing an additional $8 billion that banks can lend to stimulate the economy.

Source: Times Wire Services