Greenspan upbeat on economy

Mr Greenspan is dubious about stimulus measures

Prospects for the future of the US economy have been "scarcely diminished" by the 11 September attacks, Federal Reserve chairman Alan Greenspan has said.

In a speech aimed at summing up the effect of the attacks on the economy over the past few weeks, Mr Greenspan said that growth in productivity would undergo "a one-time downward adjustment".

"But once the adjustment is completed, productivity growth should resume at rates in excess of those that prevailed in the quarter-century preceding 1995," he told a Congress committee.

Later in the day, the gloss was taken off Mr Greenspan's remarks when chief White House economic aide Lawrence Lindsey said it was likely that the US would see two quarters of negative growth - pushing it into a technical recession.

Mr Lindsey's comment, coupled with fears over the rapid spread of anthrax scares, helped push the US financial markets into another poor day's trading.

The Dow Jones industrial average fell 151.26 points, or 1.6%, to close at 9,232.97, while the more tech-heavy Nasdaq Composite Index slumped by 4.4% to 1,646.36, its biggest drop in percentage terms since 17 September.

Efficiency fears

Mr Greenspan was responding to fears that the current slump in spending and investment - something that has particularly hit the technology sector - could put a check on growth for years to come.

Investment in technology is seen as the motor of the US economy, since it can help power efficiency gains, and therefore increase output per worker.

In a broadly upbeat speech, Mr Greenspan made no reference to the measures necessary to kick-start the economy.

The Fed has cut interest rates nine times this year - twice since the attacks - and the government is currently mulling a stimulus package to boost demand.

Quizzed about his view on what measures might be most appropriate, Mr Greenspan declined to give a direct response, arguing that the economy had enough fundamental resilience to rebound without too much outside help.

He said there was little evidence that cutting taxes on gains in stocks and financial assets - one of the main ideas under consideration - would have "any real short-term impact."

Ups and downs

Mr Greenspan said that there had been tentative signs of a recovery before 11 September.

In the days following the attacks, however, economic activity "declined significantly".

Now, he said, "the recovery has been uneven".

Retail sales have only partially recovered, and the hospitality, entertainment and airline industries are still well below pre-attack levels.

The key issue is whether current spending on defence and security will do much to help the economy, he said.

Spending on defence during the Cold War was counted in overall economic output, since it was regarded as contributing to the quality of life.

But that might not be the case this time, he said.

"In addition to the loss of human life and capital assets, these are important collateral costs associated with the new threats that we now face."

Security costs

This factor could help dampen the benefits of US productivity growth, Mr Greenspan said.

In the current crisis, the surplus output previously ploughed back into higher wages and broader investment will be spent on increasing security, representing a net loss to quality of life.

Mr Greenspan's remarks contribute to an ongoing debate about the benefits to the US economy of increasing investment in information technology.

The long-standing consensus - that greater technology use has made companies vastly more efficient - has taken a knock in recent months, and official figures on productivity growth have recently been revised downwards.

A report released on Wednesday by consultants McKinsey argued that the gains from corporate technology use had only been really felt in six sectors - retailing, wholesaling, financial markets, telecoms, semiconductors and computer manufacturing.

These sectors represent only 30% of US output, meaning that more than two-thirds of the economy has yet to benefit from the IT revolution, McKinsey said.