The Fed turns upbeat on the economy

By Alan Fram

Associated Press

WASHINGTON — Federal Reserve chairman Alan Greenspan said Thursday that recovery from the recession "is already well under way," his most upbeat assessment yet as signs of economic revival piled higher.

Greenspan’s testimony to a Senate committee followed a stack of recent reports that consumers are spending more freely, businesses are boosting production and layoffs appear to be subsiding.

His remarks were more optimistic than comments just last week, when he told a House panel that restraints on the economy "are starting to diminish."

At the White House, President Bush declined to answer what he called a "trick question" on whether the nation has emerged from recession. A panel of academic experts officially makes that call, and presidents generally avoid the matter.

"There’s no question our economy was hurt" by the Sept. 11 attacks, Bush said. "We’ll let the statisticians define what happened or what didn’t happen, but our economy went through a massive slowdown, and peoples’ lives were badly affected."

Greenspan, in an appearance Thursday before the Senate Banking Committee, repeated verbatim most of the comments he had made last week to the House panel. But he made a smattering of changes that gave his testimony a rosier tone.

"The recent evidence increasingly suggests that an economic expansion is already well under way, although an array of influences unique to this business cycle seems likely to moderate its speed," he told the senators.

Greenspan’s reference to a moderate recovery was based on strong buying by consumers that continued through this recession, which officially began in March 2001. Because their purchases never really abated, people will have less pent-up demand than usual after a slump, which should make this recovery more modest, he said.

Consumer spending accounts for two-thirds of economic activity in the United States.

Later, in response to a senator’s question, Greenspan was even clearer: "The economy appears to be turning," he said.

Private economists said Greenspan’s remarks were unambiguously upbeat, and suggested he could be telegraphing that the Fed might raise interest rates later this year. They said it is all but certain that an increase will not occur at the Fed’s next meeting on March 19.

"A week ago, Greenspan was saying we shouldn’t see any movement in interest rates for the next three to six months," said Mark Zandi, chief economist for Economy.com, an economic consulting company. "He may be laying the groundwork for a rethinking of that. Rates may have to go up sooner."

Added Joel Naroff, president of Naroff Economic Advisors: "He seemed to be saying don’t expect anything for a while. But I don’t think you can rule out an increase in June."

An interest rate increase would be the Fed’s first since May 2000. It cut rates 11 times last year in a drive to revive the economy, but left them unchanged when policymakers met last in January.

Following strong recent gains, stocks were mixed Thursday. In what analysts described as a day of profit taking, the Dow Jones average closed down almost 49 points and the Nasdaq index dropped about nine points.

Thursday also produced a new economic report bearing more good news.

The Labor Department said new claims for unemployment insurance dipped by a seasonally adjusted 5,000 last week to 376,000, in the freshest evidence that companies are easing layoffs.

The more stable four-week moving average of claims, which smoothes out week-to-week volatility, sank last week to 372,750. That was the lowest level since Aug. 11, when claims stood at 372,000.

The Labor Department also said worker productivity grew at a strong annual rate of 5.2 percent in the fourth quarter of last year, outpacing the 3.5 percent previously reported.

But that gain in productivity — the amount of output per hour of work — seemed largely attributable to companies cutting back their payrolls in response to dipping sales. That caused the total number of hours worked to drop faster than output — pushing productivity upward.

Greenspan dismissed the productivity figure, calling it "not only remarkably robust but very unlikely" because the data used is frequently revised.

Other recent reports have shown that orders to U.S. factories for expensive manufactured goods such as cars have been growing.

"We have seen encouraging signs in recent days that underlying trends in final demand are strengthening, although the dimensions of the pickup remain uncertain," Greenspan said in another remark that was new to his Senate testimony.

Greenspan repeated his belief that despite the recovery, the nation’s unemployment rate will keep rising because companies will be reluctant to quickly rehire laid-off workers. Analysts expect that measure, now at 5.6 percent, to inch higher when the February jobless rate is announced on Friday.

Greenspan also renewed his support for a temporary extension of jobless benefits for unemployed workers. The House passed a bill Thursday extending regular 26-week jobless benefits by 13 weeks for millions of workers.

That bill also contained business tax cuts its supporters say will stimulate the economy, a premise that Greenspan once again questioned.

"I doubt very much whether the economy, if it did not get a stimulus, would sag," he said.