Greenspan Says Risks Remain
Federal Reserve Chairman Alan Greenspan poured cold water Friday on optimistic business forecasts that the nation’s economic recession is all but over.
Offering his first extended comments in almost three months, Greenspan told a San Francisco audience the U.S. economy turned in a “truly impressive” performance in weathering a stock bust, a corporate investment downturn and the September terrorist attacks without severe damage.
But he cautioned against some analysts’ and investors’ sunny predictions that the economy will snap back quickly, warning there still are “significant risks” the recovery won’t take hold.
“I would emphasize that we continue to face significant risks in the near term,” Greenspan told the Bay Area Council. “Profits and investment remain weak, and household spending is subject to restraint.”
Analysts said Greenspan’s remarks suggest the central bank will cut its key, short-term interest rate still further when it meets Jan. 29-30. Policymakers have slashed the so-called fed funds rate, the interest banks charge each other for short-term loans, 11 times in the last year to a four-decade low of 1.75%.
Fed officials “are saying there is still a lot of uncertainty in the system, so they’ll probably go ahead and cut rates again,” said Stephen G. Cecchetti, a former New York Fed economist now at Ohio State University in Columbus.
If the Fed cuts rates further, it will not have to worry about rekindling inflation. A new government report Friday showed that the prices paid to American producers slipped 0.7% in December, the third monthly decline in a row. For the year, inflation at the wholesale level was the lowest it has been since 1986, according to the Labor Department report.
Investors greeted Greenspan’s sober account of the economy’s condition by pushing down stock prices. The Standard & Poor’s 500 Index fell 10.95 points, or 1%, to close at 1,145.60. The Dow Jones industrial average slipped 80.33 points, or 0.8%, to 9,987.53. The technology-filled Nasdaq composite index lost 24.76 points, or 1.2%, to 2,022.48.
The bond market took the comments as good news. The yield on the benchmark 10-year Treasury note fell to 4.86% on Friday from 4.97% on Thursday.
Greenspan acknowledged there are “a number of encouraging signs” of recovery, and traced some to the Fed’s speedy slashing of rates.
He said the nation’s consumers have provided “a major stabilizing force” by continuing to buy in the face of tumbling stocks and rising layoffs.
He said they were helped by a rate cut-induced mortgage refinancing boom that boosted the cash value people were able to pull from their homes, from a $20-billion-a-year rate in early 2000 to a $75-billion rate last summer. He said they also were helped by auto makers’ interest-free financing offers during the fall, and by a substantial decline in energy prices that helped boost households’ disposable income.
Greenspan also said businesses, aided by new high-tech information systems, were able to reduce inventories quickly in line with slowing demand. He said the trend is so advanced that firms soon must begin restocking supplies, a move that should help stabilize the economy.
“A slowing in the rate of inventory liquidation will induce a rise in industrial production,” he said. “That rise in production will increase household income and spending,” which would help spur recovery.
But Greenspan suggested there are limits to each of the economy’s sources of strength. In the case of consumers, for example, he said the mortgage refinancing boom largely has played itself out and that the beneficial effects of lower energy prices may not be long-lasting enough to keep up consumption.
And he warned that unemployment probably will continue to rise for some time to come and will “put something of a damper on consumer spending.”
As if to illustrate Greenspan’s point, Ford Motor Co. said Friday that it will cut thousands of additional jobs, close five factories and eliminate four automobile models in an effort to return to profitability. The announcement was the latest in a string of corporate layoffs that helped drive the nation’s unemployment rate to a near seven-year high of 5.8% last month.
Greenspan said the nation’s corporations suffer weaknesses similar to those affecting households, and that these will contribute to slow recovery.
He cited widespread corporate over-investment in high-tech equipment during the 1990s, followed by “fierce and unrelenting” cutbacks during the last year.
He said that globalization and deregulation have resulted in “a virtual absence of pricing power across much of American business,” leaving firms with shrunken profits and few options other than layoffs.
The Fed chairman repeated his oft-stated belief the economy still has a long stretch of technology-driven growth ahead of it. But he coupled his optimism with a warning that the economic toll of the terror attacks is as yet largely untallied.
“The tragic events of Sept. 11 have left obvious marks on the economy that will not soon fade, even though some of the initial impact of the shock has receded,” he said.
In a change from last year’s approach, Greenspan on Friday tiptoed around the subject of tax cuts.
He suggested that although tax cuts and spending increases might help speed recovery, there is no pressing need for them because already-approved measures probably would be enough.
Greenspan’s indirect backing of President Bush’s 10-year, $1.35-trillion tax-cut package was crucial to its passage last year.
He appeared to acknowledge Friday that the tax package is at least partly responsible for the sudden reemergence of federal budget deficits after years of surplus. He said the deficits are helping to push up long-term interest rates, which could slow recovery.
“Some of the firmness of long-term interest rates probably is the consequence of the fall of projected budget surpluses and the implied less-rapid pay down of Treasury debt,” he said.
