Fed Chief: Recession Over
Federal Reserve Chairman Alan Greenspan told Congress on Thursday that not only is last year’s recession over but that “an economic expansion is already well underway.”
Just eight days earlier, Greenspan had been much more cautious in his testimony, saying only that a recovery from the slump was “just getting underway.” However, he then reiterated concerns that for a variety of reasons the expansion could turn out to be significantly weaker than those that have followed previous recessions.
Over the last week, however, unexpectedly strong economic news had convinced many economists that the economy is growing at a 4% annual rate in the first three months of this year. That is much stronger than forecasters had expected only a few weeks ago. Similarly, during the period between Greenspan’s appearances on Capitol Hill, the fourth-quarter growth rate was revised upward to 1.4% annually, much faster than the 0.2% rate first estimated.
More good news came Thursday from the Labor Department, which said initial claims for unemployment benefits averaged 372,750 per week over the last four weeks, the lowest level since April 2001. That figure is well below the peak of about 500,000 reached in the weeks after the Sept. 11 attacks. Many analysts believe the department will report today that the number of payroll jobs increased last month for the first time in nearly a year.
The department also said Thursday that productivity of private businesses--the amount of goods and services produced for each hour worked--rose at an extraordinarily high 5.2% annual rate in the fourth quarter of last year. Earlier, the figure was estimated at 3.5%.
Productivity normally declines during recessions, increasing labor costs at a time business profits are already suffering from falling sales. Profits declined substantially last year, partly because many firms were unable to raise their prices due to competition and weak markets. But the strong productivity gains could become even stronger as the economy gathers steam and give a strong boost to profits this year, analysts said.
At the same time, Greenspan continued to caution about the ultimate strength of the recovery. That led many analysts to conclude that when Fed policymakers meet March 19, they are likely to continue to conclude that the possibility of further economic weakness still outweighs the risk that inflation will get worse.
Other recent figures have indicated that manufacturing firms, which were among the hardest hit by last year’s slump, have begun to increase production once more. There is also evidence that business spending on new equipment, which had been falling for a year and a half, is beginning to rise modestly. Meanwhile, housing remains one of the brightest parts of the economy, with low mortgage interest rates encouraging sales and construction.
Greenspan acknowledged all this good news Thursday in his testimony to the Senate Banking Committee.
“We have seen encouraging signs in recent days that underlying trends in final demand are strengthening,” the Fed chairman said. But, he added, “the dimensions of the pickup [in consumer and business spending] remain uncertain.”
A key concern of Greenspan and other Fed officials is whether business investment spending will gradually accelerate this year and provide a solid underpinning for the economic expansion. Many executives remain gloomy, as Goldman, Sachs & Co. told its clients this week, and that could limit their willingness to increase their capital spending budgets.
In addition, as Greenspan noted Thursday and in his testimony before the House Financial Services Committee on Feb. 27, the economic expansion also could be held back by the fact that housing and the purchases of consumer durables such as automobiles did not decline last year as they usually do during recessions. And that means there is little, if any, pent-up demand that could trigger a rapid rise in consumer spending this year.
