WASHINGTON — The nation’s economic outlook remains murky in the aftermath of the terror attacks, Federal Reserve chairman Alan Greenspan told Congress on Wednesday.
A key ingredient of economic health — productivity — is likely to suffer in the short term, he said. His comments caused a sell-off in the stock market, prompting the Dow Jones industrial average to drop by more than 150 points.
To stabilize the tottering economy, Greenspan and his Federal Reserve colleagues have cut interest rates nine times this year, with two rate reductions coming after the Sept. 11 attacks as part of an effort to bolster consumer and business confidence.
While Greenspan didn’t specifically discuss the prospects for future interest rate cuts, some private economists viewed his remarks as signaling another cut was coming, probably at the Fed’s next meeting on Nov. 6.
In the days following the attacks on the World Trade Center and the Pentagon, Greenspan said economic activity had "declined significantly." But there have been some signs of improvement since then.
"As the initial shock began to wear off, economic activity recovered somewhat from the depressed levels that immediately followed the attacks, though the recovery has been uneven," Greenspan told Congress’ Joint Economic Committee.
Deals offered by automakers produced a sharp rebound in vehicle sales at the end of September that apparently carried over into early October, Greenspan noted.
But he said that many retailers of consumer goods other than cars "have only partially retraced steep drops that occurred in mid-September."
And while air freight shipments returned to normal, Greenspan said airlines, hotels and restaurants in tourist areas were reporting that business was still off considerably from pre-attack levels.
Against this backdrop of mixed information and uncertainties on future consumer and business spending, Greenspan said more time was needed to determine how much harm the attacks will have on the economy.
"In the weeks ahead, as the initial shock continues to wear off, we should be able to better gauge how the ongoing dynamics of these events are shaping the immediate economic outlook," he said.
One loser in the short-term, Greenspan said, is likely to be productivity, the amount of output per hour of work. Increased spending on security would lead to a one-time drop in productivity, he said. But once that adjustment was made, the country should return to productivity growth rates in excess of the weak increases endured for the two decades before 1995.
Since 1995, annual growth rates in productivity have doubled from the preceding two decades and this improvement had been a chief factor in boosting standards of living.
Greenspan said he was not only bullish about the long-term prospects for productivity growth but also for the overall economy.
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