Greenspan Hedges His Outlook

Federal Reserve Chairman Alan Greenspan said Wednesday that the U.S. economy is “still struggling” with the aftershocks of the September terror attacks, and he suggested for the first time that it may never fully recover the snap it enjoyed in the late 1990s.

Although he sought to telegraph an upbeat message, the Fed chairman painted an uncertain portrait of the economy, which he said suffered a significant fall in the wake of the attacks.

“As the initial shock began to wear off,” he told the congressional Joint Economic Committee, “economic activity recovered somewhat from the depressed levels that immediately followed the attacks, though the recovery has been uneven.”

Greenspan gave little hint about when he thinks the economy will begin a more robust recovery or what more the Fed will do to encourage it. The central bank has trimmed a full percentage point from its benchmark interest rate since the Sept. 11 attacks, pushing it to a four-decade low of 2.5%.

The stock market reacted to Greenspan’s testimony and an anthrax scare at the Capitol by sinking. The Nasdaq composite index fell 75.73 points, or 4.4%, its largest loss since Sept. 17, the first day of trading after the attacks. Other major market measures also fell, although not as sharply.

As telling as Greenspan’s account of the economy’s immediate situation was his assessment of its long-term prospects.

Although he repeated his oft-stated belief that new technology ensures the country will experience another round of productivity gains similar to those of the 1990s, he appeared to hedge his claims much more than in the recent past.

He said, for example, that productivity “will presumably undergo a one-time downward adjustment” as companies hire more security guards, stockpile extra inventories and build backup facilities to be prepared in case of future terrorist acts.

In doing so, firms will undo some of the improvements they made during the last decade, when, according to Greenspan, new information technology allowed them to operate with fewer workers and smaller inventories.

“It’s a reversal of some of the forces which engendered the productivity acceleration of the last five years,” Greenspan said of the forces unleashed by the attacks.

Productivity, or output per hour of work, is considered a fundamental measure of an economy’s efficiency and usually is considered an important determinant of the living standards workers can expect.

Although Greenspan asserted productivity could resume its upward march once the economy regained its balance, he suggested it would not do so with the same gusto as in the 1990s. Analysts said that would be a bitter pill for the Fed chairman, who considers the boom of the late 1990s and the advent of the high-tech “new economy” to be among his proudest accomplishments.

“He’s not saying prosperity won’t return, but he’s having to back off on the guarantee it’s going to be smartly rising prosperity,” said economist Gregory D. Hess of Oberlin College. “He’s having to back off on the ‘new-economy’ language.”

“What he’s saying is that it may never again be as good as it was over the last decade,” said David M. Jones, a veteran Fed watcher and chairman of Aubrey G. Lanston & Co. in New York.

Greenspan’s more muted claims came as a new study showed that the strong productivity gains of the late 1990s were concentrated in a relatively few industries, rather than spread across the economy as the Fed chairman and others have portrayed them, and are unlikely to be fully sustainable.

The study by McKinsey & Co, a New York-based consulting firm, concluded that less than half the gains were traceable to high-tech investment, as new-economy advocates claimed The authors said most of the improvement was the result of such mundane changes as management reorganization and new warehousing techniques only partially related to computers.

“The moral of the story is that the new economy was hype,” said MIT economist and Nobel Prize winner Robert M. Solow, who helped supervise the study. “What we experienced in the 1990s was a half-new economy,” he said.

Productivity improved at a 2.5% annual rate from 1995 to 2000, according to the Labor Department. That was nearly twice the 1.4% rate that characterized the years leading up to 1995. It sparked hopes for a sustained improvement in U.S. living standards and helped send the stock market rocketing.

But the McKinsey authors conclude the productivity growth rate is likely to settle at a 2% rate and could slip to 1.6%. Both are improvements over the 1973-1995 period but not nearly as dramatic ones as many--including Greenspan--had believed were underway.