The U.S. economy is on the upswing and should begin to generate more jobs soon, Federal Reserve Chairman Alan Greenspan said Thursday as reports showed worker productivity surging and unemployment claims falling.
Greenspan accompanied what he called his "relatively optimistic" short-term forecast with a stern warning about the long-term dangers of swelling budget deficits. He urged lawmakers to narrow the gap by cutting spending, not raising taxes.
But for the time being, the Fed chairman sees better days ahead. In remarks to a securities industry conference in Florida, he said the odds "increasingly favor a revival in job creation" as employers find it more difficult to satisfy rising demand by drawing down inventories or squeezing more out of their existing workforces.
That would mark a turning point in a 2-year-old recovery that so far has failed to generate many jobs despite big gains in business output and profits.
If Greenspan's prediction proves accurate, it could lift the reelection prospects of President Bush, who has been accused of doing too little about the jobless recovery, and deflate one of the Democrats' most potent campaign issues. The economy has lost 2.5 million jobs since Bush took office.
Now, "in jobless claims, consumer confidence, manufacturing surveys, people feel the ice breaking," said James Glassman, senior economist with J.P. Morgan Chase in New York. "Growth is far exceeding expectations. It's looking pretty vigorous."
Treasury Secretary John W. Snow said that "it is clear we have entered a new phase of economic expansion." He cited last week's report that the economy expanded at a 7.2% rate in the third quarter, the strongest growth in almost two decades.
"This is not a fleeting glimmer," Snow told members of the Economic Club of Washington late Wednesday.
In the third quarter, the productivity of U.S. workers surged as employers responded to the accelerating recovery by producing more with their existing workforces instead of by hiring new people or bringing back those laid off, the Labor Department said.
The amount of goods and services produced for every hour worked jumped 8.1%, following a 7% second-quarter gain. It was the biggest increase since the first quarter of 2002, when productivity rose 9.3%.
In a separate report, the department said initial claims for unemployment benefits had fallen sharply last week to 348,000, a sign the recovery was gaining momentum and the job market was taking a turn for the better. It was the lowest claims figure since January 2001, two months before the last recession began.
A more critical piece of evidence will be provided today, when the government releases October employment figures. Economists are predicting a sizable increase, although perhaps not enough to bring down the nation's 6.1% jobless rate.
Greenspan attributed the economy's "lackluster" performance over the last two years to uncertainties accompanying the prospect of war in Iraq and lingering concerns from last year's corporate governance scandals.
Although American consumers held up their end of the bargain -- spending their tax cuts and increasing their debt to buy homes, cars and appliances -- businesses were more cautious, avoiding new investments and putting off new hires, Greenspan said.
Their skittishness is one explanation for the "astonishing" productivity gains of recent months, Greenspan said. Other factors appear to include a return to financial discipline after the growth binge of the late 1990s and a delayed payoff from productivity-enhancing investments in new technologies.
"One consequence of these improvements in efficiency has been a temporary ability of many businesses to meet increases in demand while paring existing workforces," Greenspan said.
That may be about to change, he suggested, as inventories dwindle and existing workers strain to keep up with steadily rising demand for goods and services. "Efforts to rebuild inventories and a dwindling pool of possible efficiencies seem a combination that could generate a notable pickup in hiring should growth in final sales remain firm," he said.
The longer-term outlook is more troubling, Greenspan said.
The federal deficit is expected to top $500 billion in 2004, a sharp reversal from the budget surpluses of the late '90s. The deterioration reflects a combination of forces: the economic slump, the Bush tax cuts and the costs of the war on terrorism and the military offensives in Afghanistan and Iraq.
Some of the red ink "was probably unavoidable," Greenspan said, but unless steps are taken to reduce future deficits, it will be difficult to maintain Social Security and Medicare benefits once baby boomers begin retiring a few years from now.
Greenspan advised against big tax increases to close the budget gap. Doing so, he said, could endanger future economic growth. "The exact magnitude of such risks are very difficult to estimate," he said, "but they are of enough concern in my judgment to warrant aiming to close the fiscal gap primarily, if not wholly, from outlay restraint."
Although the economy is accelerating, there is "scant evidence" that inflationary pressures are building, Greenspan said, adding that the Federal Reserve was inclined to keep short-term interest rates at 40-year lows for the time being.