Stall at Year-End Has Passed, Greenspan Says


Federal Reserve Chairman Alan Greenspan said Tuesday that the economy apparently stabilized after virtually stalling at the start of this year, but that many “downside risks” still loom over the long-running expansion.

Greenspan did not directly address whether the Fed would soon cut interest rates again to encourage economic growth. But some analysts interpreted his sober analysis as leaving room for further cuts if necessary--although probably more limited than those approved by the Fed in January.

His guarded remarks disappointed some on Wall Street, where many investors had hoped the Fed would stay on a course of rate slashing. Stocks closed mostly lower, with the Nasdaq composite index tumbling 2.5% to 2,427.72. Bond yields rose.


Offering the Senate Banking Committee his semiannual economic assessment, Greenspan described an economy that deteriorated rapidly in the closing months of 2000 as corporations and consumers responded swiftly to such warning signs as falling stock prices. Unsold products piled up, lenders became more wary and consumers cut back on purchases.

Such adjustments occurred faster than in the past, Greenspan said, as information technologies and modern inventory management techniques--which helped bring on the boom times--also “accelerated the process” of cutting back.

The “exceptional weakness” of late last year “apparently did not continue in January,” he said.

Nonetheless, Greenspan added, Fed policymakers still believe that “risks are weighted” toward “economic weakness in the foreseeable future.” Fed officials generally see “a substantial slowdown, on balance, for the year as a whole,” he testified, although the economy should be growing faster at the end of the year than at the beginning.

Such risks include a further slide in consumer confidence and continued steep cutbacks in factory production. “We don’t know how far the adjustment” in excessive inventories will go in further cutting back production, he said.

Joel L. Naroff, an economic consultant near Philadelphia, said Greenspan’s remarks suggested the Fed was moving away from its recent “stop the recession” stance of aggressive interest rate-cutting to an approach of “watchful waiting.”


The Fed “may indeed lower rates further,” Naroff said. “But the comments made today seem to raise the possibility that any additional moves may be limited.”

The Fed cut short-term rates by a full percentage point in January, the biggest monthly rate cut during Greenspan’s tenure at the Fed.

Shortly before Greenspan spoke, the government reported that retail sales surged 0.7% in January, the biggest increase since September and evidence that the economy may be showing some flickers of life. Retail sales had risen a paltry 0.1% in December after falling sharply in November.

Asked if the United States has slipped into recession--traditionally defined as six months of declining economic output--Greenspan replied: “At the moment, we are not.”

He cautioned that forecasters have great difficulty predicting recessions, which may be triggered by abnormal economic behavior as confidence plunges.

“This unpredictable rending of confidence is one reason that recessions are so difficult to forecast,” said Greenspan, whose every utterance on the economy is parsed and interpreted for hidden meanings and subtle guidelines. “Our economic models have never been particularly successful in capturing a process driven in large part by non-rational behavior.”


He compared a total breakdown of consumer and business confidence to what happens when a dam breaks, a process that at least in economic terms has some benefits: “The torrent carries with it most remnants of certainty and euphoria that built up in earlier periods.”

Greenspan also said that faster technology and decision-making in the economy have prompted the Fed to act more swiftly than in the past.

“Economic policymaking could not, and should not, remain unaltered in the face of major changes in the speed of economic processes,” he said.

While Greenspan’s testimony bristled with cautions about U.S. economic fragility, it also suggested that some basic economic strengths endured. He stressed increased productivity, spurred by modern technology. In addition, he noted that consumer confidence, which has fallen sharply, nonetheless remained at a level that “in the past was consistent with economic growth” rather than recession.

Greenspan also said that while soaring energy costs had weakened the economy, the prospect of lower energy prices in coming months might be “an important factor supporting a recovery” in the future.

In the past, he said, it would have taken businesses longer to figure out that demand for their goods was sliding, leading to a lengthier period of adjustment and, possibly, a more protracted slowdown.


Senators expressed great interest in Greenspan’s recent declaration that he supported a tax cut. But the Fed chairman declined to endorse a particular proposal and emphasized that he was not addressing the issue of whether such a cut should be made retroactive.

The Fed’s latest economic forecast, unveiled Tuesday, anticipates a sharply slower economy this year but one that will skirt recession. Fed officials said the economy will grow in the modest range of 2% to 2.75% this year, a more lackluster performance than had been expected just last summer, when the Fed foresaw growth in the range of 3.25% to 3.75%.

The Fed also raised its unemployment estimate to around 4.5% by the end of this year. Last July, it had estimated unemployment would climb to 4.2% by the end of 2001--the level it reached last month.

Inflation is expected to ease, however, reflecting slower economic activity. A key gauge of inflation was predicted to rise this year from about 1.75% to 2.25%, compared to the Fed’s July forecast of 2.5%.