Greenspan says economic recovery ‘is already under way’

By Jeannine Aversa

Associated Press

WASHINGTON – Federal Reserve Chairman Alan Greenspan offered his most optimistic assessment of the U.S. economy in more than a year, telling Congress Thursday that the country is now recovering from its first recession in a decade.

Greenspan’s testimony to the Senate Banking Committee was more upbeat than his outlook just a week ago.

“The recent evidence increasingly suggests that an economic expansion is already under way,” Greenspan said. That assessment was not part of his testimony to the House Financial Services Committee last week.

Since Greenspan’s last appearance on Capitol Hill, a batch of encouraging economic news has been released providing strong evidence that the country is on the mend from the recession, which began in March 2001.

For the first time in 18 months, a key gauge of manufacturing activity flashed a growth signal in February. Consumers, the lifeblood of the economy, spent more freely in January. And, the economy bounced back with a 1.4 percent growth rate in the fourth quarter of 2001, after shrinking at a 1.3 percent rate following the Sept. 11 terrorist attacks.

Even with his more upbeat assessment, Greenspan cautioned Americans not to anticipate a red-hot rebound.

“An array of influences unique to this business cycle seems likely to moderate its speed,” Greenspan said.

Because consumers kept buying throughout the slump, they will have less pent-up demand. That means spending probably won’t rise as quickly as in past rebounds, making the recovery less robust than usual, Greenspan said.

That strength in consumer spending, which accounts for two-thirds of all economic activity, is a key reason why the economy didn’t sink deeper into a recession. Consumer spending on big-ticket items, such as homes and cars, is usually hard-hit during recessions.

Economists said Greenspan’s remarks make it all but certain that the Fed’s aggressive rate-cutting campaign has ended. They predict that Fed policy-makers, who left short-term interest rates unchanged in January, will forgo a reduction at their next meeting on March 19.

“The Fed chairman was extremely cautious last week and seemed to be tiptoeing around the idea that an economic rebound could be forming,” said economist Joel Naroff of Naroff Economic Advisors. “Today, he seems willing to accept the fact that the economy has turned a corner, but he still sounded caution about the strength of the expansion that will follow.”

Naroff suggested Greenspan’s more upbeat remarks could be the first step toward trying to prepare the country for the possibility that the Fed could boost interest rates sometime down the road.

Investors could have been thinking the same thing. By late morning, the Dow Jones industrial average had lost 69 points and the Nasdaq index was down 1 point.

Recent reports, meanwhile, also have shown that orders to U.S. factories for big-ticket manufactured goods, including cars, has been picking up.

“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 addition to his Senate testimony that wasn’t included in his House testimony.

Greenspan said that consumer spending received a considerable lift from the sales of cars and trucks, which were remarkably strong in October and November, aided by major financing incentives.

“Sales have receded somewhat, but they have remained surprisingly resilient,” Greenspan said. “Other consumer spending appears to have advanced at a solid pace in recent months.”

Greenspan repeated his belief that the recession will probably turn out to be the mildest in U.S. history.

Based on current data, the drop in economic output during this recession, as measured by the gross domestic product, is a small 0.3 percent, which would make this the mildest recession ever. That record has been held by the 1969-70 recession, which GDP fell by 0.6 percent.

Economists predict the National Bureau of Economic Research, the recognized arbiters of when recessions begin and end, will declare this one ended in December, January or February.

The Federal Reserve slashed interest rates 11 times last year in an effort to revive the economy. Many economists believe those rate cuts will pave the way for the economy to return to healthy growth rates in the second half of this year.