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Friday, 11 January, 2002, 21:47 GMT
US economy faces 'significant risks'
US Federal Reserve Chairman Alan Greenspan
Mr Greenspan's comments took analysts by surprise
The US economy is showing signs of recovery but still faces significant risks in the short run, according to the US Federal Reserve chairman Alan Greenspan.


It seems to me that he's keeping the door open for rate cuts

Carey Leahey, Deutsche Bank Securities
"Recent signals about the current course of the economy have turned from unremittingly negative through the late fall of last year to a far more mixed set of signals recently," he said in a prepared text for a speech to be given to businessmen in San Francisco.

"But I would emphasize that we continue to face significant risks in the near term," he added.

Speculation had been growing that Mr Greenspan would use the speech to say that the worst of the current economic slowdown had passed.

More rate cuts to come?

But analysts said his relatively cautious comments implied that more interest rate cuts could be on the way.

"It's a little more negative on the economy than I expected," said Carey Leahey, senior economist at Deutsche Bank Securities in New York.

"It seems to me that he's keeping the door open for rate cuts."

"I'm surprised about the overall message," said Hugh Johnson, chief investment officer at First Albany.

"The comments we have seen from other Fed officials have suggested they believe an economic recovery is on the horizon. The tone of Greenspan's remarks is markedly different."

Share prices on Wall Street fell back after Mr Greenspan's views became known.

The main Dow Jones share index fell back below the 10,000 level, and eventually closed down 80.33 points at 9,987.53.

Recession

In November last year the National Bureau of Economic Research, a panel of senior economists, declared that the US economy had entered recession in March.

The move brought an end to a decade of sustained growth.

In an attempt to revitalise the flagging economy, the US Fed cut interest rates 11 times last year to 1.75% - their lowest level for 40 years.

But in recent weeks, economic commentators had begun to see signs that the downturn has started to 'bottom out'.

Consumer confidence has begun to rise, orders to manufacturing and service firms have increased, and the housing market has remained strong.

But Mr Greenspan said he did not believe the evidence was conclusive.

"Despite a number of encouraging signs of stability, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold."

He said the key to the economy's revival would be when US firms showed signs of recovery.

"The broad contours of the present cycle have been, and will continue to be, driven by the evolution of corporate profits and capital investment."

The latest unemployment figures released last week showed the jobless rate rose to 5.8% in December, and Mr Greenspan said this rate is likely to continue to rise even after the recovery begins.

See also:

04 Jan 02 | Business
US jobless rate grows
02 Jan 02 | Business
US economy turning up?
02 Jan 02 | Business
US factory output picks up
19 Dec 01 | Business
Dow signals US recovery
19 Dec 01 | Business
US trade soars to recovery
12 Dec 01 | Business
US interest rates cut again
12 Dec 01 | Business
False starts for US economy optimism
11 Dec 01 | Business
US recession may already be over
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