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On the road to recovery
Compiled from Times wires WASHINGTON -- Federal Reserve chairman Alan Greenspan said Wednesday he thinks an economic recovery "is just getting under way," but he cautioned that it's likely to be more moderate than the rebounds that have followed most other U.S. recessions. "Although there are ample reasons to be cautious about the economic outlook, the recuperative powers of the U.S. economy . . . have been remarkable," Greenspan told the House Financial Services Committee. "Despite the disruptions engendered by the terrorist attacks of Sept. 11, the typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity." Fueling his assessment Wednesday was a report that orders to U.S. factories for big-ticket goods rose a larger-than-expected 2.6 percent in January, suggesting the nation's battered manufacturing sector is edging toward a recovery. A second report that showed that new-home sales tumbled last month was brushed aside by economists, who said the housing market remains in good shape. Federal Reserve officials now expect the economy to grow 2.5 to 3 percent during the course of this year, a pace that "is somewhat below the rates of growth typically seen early in previous expansions," Greenspan said. Several factors will be at work holding back the economy, the Fed chairman said. Consumer spending, particularly for new cars and trucks, has remained relatively healthy during the recession that began last spring rather than declining as it has in most slumps. That means there is no "pent-up demand" to put spending into overdrive as in the past, he said. At the same time, Greenspan said, a number of industries still have large amounts of excess production capacity, which means investment in new plants and equipment probably will be slow to rise. In addition, weak economies in several foreign nations will limit export sales, while uncertain conditions in U.S. financial markets may continue. All these factors together "seem likely to restrain the near-term performance of the economy," he concluded. Fed officials also expect the 5.6 percent jobless rate will rise to 6 to 6.25 percent late this year, he said. That would be in line with past experience because initially "firms rely primarily on overtime and shifts from part-time to full-time work" rather than adding workers as their sales pick up, he said. Greenspan did not address the issue of when and under what circumstances central bank policymakers could decide to begin to raise their 1.75 percent target for overnight interest rates, a target they cut 11 times last year. Many financial analysts expect the Fed to begin to raise the target sometime after the middle of the year once a solid recovery is clearly in place. Many Fed officials believe the current target couldn't be maintained once the economy is healthy again without eventually causing inflation to get worse. But if the unemployment rate is close to 6 percent and the inflation rate is running around 1.5 percent, as their forecasts predict, there may be no rush to raise the target. For example, economists at Salomon Smith Barney in New York expect the target to be no higher than 2.25 percent at the end of the year. Greenspan's remarks suggested "cautious optimism in the sense that economic data do seem to be coming up roses, yet a few thorns remain on the stems, namely weak business investment spending, higher unemployment rates and the uncertainties surrounding the collapse of Enron," said Richard Yamarone, economist with Argus Research Corp. He predicts a rate increase by midyear. In other news, the solid advance in orders for durable goods -- costly manufactured items expected to last at least three years -- followed a 0.9 percent rise in December, the Commerce Department reported Wednesday. The increase, to a seasonally adjusted $179.1-billion, was the third in the past four months. Higher demand was reported for cars, computers, semiconductors, machinery and metals. "It is clear that momentum is building for a manufacturing turnaround in the early months of 2002," said Jerry Jasinowski, president of the National Association of Manufacturers. Separately, new-home sales, after rising 3 percent in December, fell 14.8 percent in January to a seasonally adjusted annual rate of 823,000, the lowest level since June 2000, the Commerce Department said. Sales of previously owned homes -- the biggest part of the housing market -- reached a record last month, aided by low mortgage rates, mild weather and solid housing appreciation. -- Information from the Washington Post and Associated Press was used in this report.
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From the Times Business report
From the AP
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