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Friday, 31 August, 2001, 16:12 GMT 17:12 UK
Greenspan: Consumers driving economy
Bar graph showing US growth rates for the last six quarters
US GDP continues to slow, threatening world economies
By BBC News Online's North America business reporter David Schepp

US Federal Reserve chairman Alan Greenspan has told a group of banking officials that wealth generated during the stock market run-up in the 1990s appears to explain continued consumer spending.

"The influence of capital gains on economic behaviour is likely to be of substantial consequence for the prospective performance of the economy," Mr Greenspan said in comments in Jackson Hole, Wyoming, site of a meeting of fiscal policymakers.

Alan Greenspan says gains in stock prices in the '90s have kept consumers spending
Alan Greenspan says gains in stock prices in the '90s have kept consumers spending...
He said: "The massive increase in capital values over the past five years had a profound impact" on US consumers ability to spend and spur growth in the economy.

Wealth effect

Mr Greenspan also noted that a run-up in home values during the same period has also prompted spending on the part of investors.

It is part of the so-called "wealth effect", the belief that a feeling of wealth relates to increased or at least continued spending among consumers.

The sheer size of the increases in wealth, Mr Greenspan said, "suggests that capital gains on equities have been a more potent factor in determining spending than gains on homes."

In recent months investor apathy has taken hold amid declining stock prices
...but in recent months investor apathy has taken hold amid declining stock prices
He added that is important for the US central bank to understand the implications of spending caused by the feeling of greater wealth.

"For example, over the past year and a half, home values have appreciated , whereas equity prices have contracted significantly," Mr Greenspan said.

He added that under such circumstances, demand could be influenced depending on which assets are gaining or losing value.

Bullish consumers

Consumers for the most part have yet to slow spending in reaction to the economic slowdown, many analysts think it is just a matter of time before layoffs and recession fears put a lock on consumer spending.

In fact, slowing has already been seen in the automobile sector, which has relied on expensive rebates and cut-rate interest rates for much of the year to spur demand.

On Wednesday, one of the best-respected indices of consumer confidence - issued by the Conference Board - fell to 114.3, its lowest level in four months. Observers had expected a slight rise.

In July the index also slipped to 116.3, revised downwards from the original 116.5 and a fall of 1.4 points.

The Board said the decline was the result of growing worries about unemployment among the US workforce - hardly a surprise given the mass layoffs being planned and implemented by dozens of corporations large and small.

What a difference a year makes

Federal Reserve policymakers have gathered in Wyoming amid an economic slowdown that marks a stark contrast to the economy of just a year ago.

Last Labor Day weekend, fears of an overheating US economy that may turn inflationary still guided the policies set in place by central bank governors.

This year, concern over rising prices has yielded to an ever-slowing economy that is dangerously close to slipping into recession.

The annual meeting, sponsored by the Kansas City Federal Reserve Bank, comes on the heels of comments of US President George W Bush, who said earlier in the week he is deeply concerned over the fate of the US economy.

Mr Bush isn't the only one that's concerned. Companies across the country are reining in expenses, cutting jobs and reducing inventories in an effort to ride out the economic slowdown.

Doom and gloom

While most of the doom and gloom is the responsibility of corporations issuing profits warnings, Fed chairman Alan Greenspan's recent comments have also added to the pessimistic mood among investors.

Mr Greenspan sent shivers through financial markets after Congressional testimony in July, saying the American economy still faced considerable uncertainties, and interest rates might need to be lowered further.

"Pressures on profit margins have been unrelenting... weakness is evident virtually across the board," he said.


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FULL SPECIAL REPORT
See also:

27 Aug 01 | Business
Fresh signs of US slowdown
30 Aug 01 | Business
US consumers slow spending
29 Aug 01 | Business
Bush says US recovery 'very slow'
28 Aug 01 | Business
US shares slide on weak data
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