Greenspan upbeat on US recovery

When Alan Greenspan speaks, everyone listens

Alan Greenspan, the chairman of the US central bank, has said that the US economic recovery is well under way.

In his most optimistic statement yet, the influential central banker told the Senate Finance Committee that "recent evidence increasingly suggests that an economic expansion is already well under way".

It was a highly unusual revision of Mr Greenspan's testimony just one week ago to the House of Representatives where he sounded a more cautious note.

Then, the US Federal Reserve chairman said merely that some of the forces that had been restraining the US economy were "starting to diminish."

Normally Mr Greenspan makes the same assessment to both Houses of Congress in his semi-annual report on the US economy.

Encouraging data

Since Mr Greenspan first spoke, some economic data has emerged to suggest that the US economy had been growing much faster in the last three months of 2001 than previously believed.

US GDP growth 2001

Q1 +1.3%

Q2 +0.3%

Q3 -1.3%

Q4 +1.4%

Factory orders have begun to pick up as inventories are liquidated, and durable goods orders have been strong.

But new home sales fell sharply in January despite the lower interest rates.

And consumer confidence fell unexpectedly this week, while industrial output continues to fall and unemployment is still rising.

Mr Greenspan on Thursday again warned that "an array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery."

"The dimensions of the pick-up remain uncertain," he said.

Rate cut caution

Mr Greenspan was guarded on the question of whether the Fed would begin to raise rates again.

In 2001, the Fed cut interest rates 11 times to 1.75% in attempt to jump-start the economy before pausing in January.

Economists said that Mr Greenspan's remarks signalled that he would keep rates unchanged.

"The Fed will probably hold rates steady at a low level as long as they can," said Gary Thayer, chief economist at AG Edwards & Sons

"As long as the unemployment rate is rising, they'll maintain a policy bias toward weakness."

Stimulus doubts

The Fed chief's remarks came as the US House of Representatives passed a heavily diluted version of President George Bush's economic stimulus package, aimed at shoring up growth in the wake of the 11 September attacks.

Mr Greenspan on Thursday reiterated his view that the stimulus package is not essential to the US recovery.

The problems of Enron are readily traceable to an old fashioned excess of debt

Alan Greenspan, US Federal Reserve

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

The final draft of the stimulus package, which comprises modest business tax cuts and an extension of unemployment benefit payments, must now gain the approval of the US Senate.

Company spending the key

Mr Greenspan pointed out that the current recession was caused by "sharp cutbacks" in capital spending by companies, which "interacted with and were reinforced by falling profits and equity prices."

And he said that any recovery in business capital spending was likely to be gradual.

He warned that of the "Enron effect" which could make other "new economy" companies more susceptible to contagion.

But Mr Greenspan did not believe there was a systemic risk arising from Enron, and he was generally optimistic about the "recuperative powers of the US economy" which he said "had been remarkable."