Greenspan Upbeat on 1st-Quarter Growth

Federal Reserve Board Chairman Alan Greenspan said Friday that the U.S. economy grew at an annual rate of about 2% during the first three months of the year, faster than most economists had estimated and the strongest indication yet that the stagnant economy has started to grow again.

That positive news came on top of figures showing that construction of new homes and apartments in March reached their highest level in two years.

Greenspan’s assessment was more upbeat than an early April survey of 50 leading economists, whose consensus prediction was for first-quarter growth of only 1.2% at an inflation-adjusted annual rate. The economy grew at a barely perceptible 0.4% during the final quarter of last year.

In a signal that the Fed is prepared to cut interest rates further, if necessary, to stimulate the economy, Greenspan also said that he did not consider 2% growth to be “adequate.” In testimony before the Senate Banking Committee, the Fed chairman said that the current growth rate would not be enough to significantly bring down the unemployment rate, which stands at 7.3%.

Nonetheless, Greenspan warned the senators against tax cuts or spending increases that would make the budget deficit bigger and inflame stock market fears about the long-term outlook for inflation. Renewed inflation fears could drive up long-term interest rates, the benchmark for 30-year home mortgages.

Greenspan said that lower interest rates were “the major thrust to economic growth in the short run,” leading to mortgage refinancings, lower debt service burdens for American households and corporations and more spending by consumers and capital investments by corporations.

A group of leading economists, including several Nobel Prize-winners, recently urged the federal government to spend more money on investments in public works, education and other programs to jump-start the economy. But Greenspan on Friday reiterated his opposition to such a strategy. “A major fiscal policy expansion at this stage, in my judgment, is still premature,” he said.

Greenspan and Securities and Exchange Commission Chairman Richard Breeden both testified that the recent plunge in the Japanese stock market, down more than 50% since 1989, will have “limited” impact on the U.S. economy and the U.S. stock markets.

“There is no direct linkage, no automatic, inevitable result spilling over from one market to the other,” Breeden said. Greenspan added: “The Japanese stock market decline does not appear to have had important spillover effects on U.S. financial markets to date.”

Many Wall Street analysts have fretted that falling stock prices in Tokyo would force Japanese banks and investors to liquidate bond, stock and real estate holdings in the United States to raise cash. Greenspan said that “these fears, while understandable, seem to me exaggerated.”

Greenspan said Japanese investors in 1990 sold about $20 billion in U.S. Treasury bonds. But he said such sales “need not be terribly disruptive” because Japanese investors held only 2% to 3% of outstanding marketable U.S. Treasury securities.

In 1991, Japanese investors were “small net purchasers of U.S. bonds and stocks,” Greenspan said in prepared testimony.

Japan’s financial woes have forced that nation’s banks to slash their overseas business, however, Greenspan said. While the international assets of Japanese banks almost quadrupled between 1984 and 1989, those assets fell in 1990 and 1991. Their share of international assets held by banks fell from nearly 40% to less than a third, he said.

Greenspan blamed the plunge in the Japanese stock market on “a correction of the bubble in asset prices.”

He said that it would probably not hurt Japanese consumers much, noting that stocks make up less than 10% of the wealth of Japanese households.