Greenspan Sees Added Risk of Mild Recession
Federal Reserve Chairman Alan Greenspan said Tuesday that the U.S. economy may have stopped growing, suggesting that the nation might be slipping into a recession for the first time in four years.
Greenspan’s remarks also reinforced speculation among many economists that the Fed, in a bid to reignite the economy, will cut short-term interest rates as early as next month.
In a speech delivered Tuesday night to the Economic Club of New York, the Fed chief said the economy’s abrupt slowdown in April, May and June means there is “increased risk of a modest near-term recession,” although he said such a scenario “is yet to be determined.”
Greenspan had hinted earlier in the day that the economy--which last posted a quarterly contraction in early 1991, just as the last recession was ending--was again in danger of showing no growth.
He told the Senate Banking Committee in Washington that the economy has shown “very little” expansion in the current quarter, and is now displaying “a very low rate of increase” that “could be marginally negative.”
Greenspan’s stark comments came as the Commerce Department offered fresh evidence of the economy’s lingering weakness. The agency said construction of new houses fell 4.4% in May for its fourth decline in the last five months, and that new home building overall--including apartments--fell 1.3% last month.
In addition, UCLA business forecasters--citing the national economic slowdown--today are expected to slash their estimate of California’s job growth this year to only 1.8%, half the 3.5% growth they had forecast last December.
As usual, Greenspan did not announce what action the Federal Reserve Board might take to reinvigorate the economy. (A contracting economy does not in itself qualify as a recession. A recession is usually defined as two or more quarters of negative growth.)
But his comments indicated a deepening concern about the severity of the slowdown. Only two weeks ago in a speech to bankers meeting in Seattle, Greenspan suggested he wasn’t overly troubled about the economy’s sluggishness, even though he said then that the slowdown was “very pronounced.”
“The process has not been entirely smooth,” he said in his prepared remarks Tuesday. “Anyone who thought it would be is not a very close student of economic history or human nature.”
If the Fed does cut interest rates at its next policy meeting July 5-6, it could give American consumers another break because it likely would spark further cuts in mortgage rates and other lending costs.
“They’ll go ahead and ease,” predicted Maury N. Harris, chief economist at PaineWebber Inc., using Wall Street’s vernacular for how the Fed lowers the cost of borrowing by “easing” its grip on the supply of money.
But other analysts said Greenspan--at least at his Senate Banking Committee appearance--offered no new clues as to what changes, if any, the Federal Reserve Board has in mind.
“I didn’t think he tipped his hand either way,” said Joseph G. Carson, chief economist at Dean Witter Reynolds Inc. “I just don’t think the [economic] slowdown has been deep enough or long enough to satisfy enough members of the Fed” to cut rates in July, he said.
Indeed, not everyone is convinced that a recession is at hand. Adrian Sanchez, an economist at First Interstate Bancorp in Los Angeles, said the economy still appears to be growing at a sluggish pace and that the Fed governors will “prefer to wait as long as they can” before changing interest-rate policy again.
Meanwhile, financial markets had a muted response to Greenspan’s earlier comments, with bond and stock prices showing minor changes. The price of the Treasury’s bellwether 30-year bond fell about one quarter of a point, or $2.50 for every $1,000 in face value, and its yield--which moves inversely from price--edged up to 6.58% from 6.56% late Monday. The Dow Jones average of 30 industrial stocks slipped 3.12 points from its record high, to 4,550.56.
Analysts attributed the markets’ lukewarm reaction to several factors. Some cited the debate about how soon the Fed might lower rates, while others noted that the markets already have rallied sharply this year on expectations of lower rates to come.
Some also noted that traders were reluctant to push stock and bond prices in either direction until they had heard Greenspan’s comments Tuesday night in New York.
It was the Fed’s series of interest-rate increases that slowed the economy in the first place. The central bank lifted rates seven times during the 12 months ended last February.
As a result, the U.S. gross domestic product, the nation’s broad measure of economic activity, already had dropped to a 2.8% annual growth rate in this year’s first quarter, down from a torrid 5.1% pace in the fourth quarter of 1994.
And many analysts, looking for the hoped-for “soft landing” of the economy, had expected the economy to grow 2% to 2.5% from April through June. But they’ve lowered those estimates to 1.5% or less recently after a series of reports showed the economy slowing much more rapidly than expected.
Times staff writer Jonathan Peterson contributed to this story.
* CALIFORNIA SLOWDOWN? UCLA sharply lowers predictions for state’s job growth. D1
