The chairman of the US Federal Reserve, Mr Alan Greenspan, all but declared the 10-month recession in the US to be over when he gave an upbeat assessment of economic trends to a US Congressional committee yesterday.
Economic data showed that the economy was rebounding, Mr Greenspan said, and the opinion of Federal Reserve governors was that the US would see growth of between 2.0 per cent and 2.5 per cent this year. In testimony to the House Financial Services Committee, the Fed chairman highlighted the factors behind what he indicated would be a hesitant recovery after a mild recession:
Businesses have whittled down their inventories and would be making significant new orders soon.
Low mortgage rates have stimulated home sales.
Consumer spending has been boosted by record vehicle sales.
The Federal Reserve expects inflation to remain low.
The soft jobs market will hold wage inflation in check.
A recovery in high-tech investment is under way.
Wall Street greeted the testimony - which contrasted with Mr Greenspan's more foreboding analysis of the economy in early January - with some relief. By midday the Dow Jones Industrial Index had made three-figure gains before falling as investors booked their profits.
"Despite the disruptions engendered by the terrorist attacks of September 11th, the typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity," Mr Greenspan said.
"An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery."
He was dismissive of the effect of the collapse of Enron on the economy - though some committee members took him to task for not emphasising strongly enough the need for tighter regulatory supervision of corporate America by the Securities and Exchange Commission (SEC).
"The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalised reputation," Mr Greenspan said.
"The physical assets of such a firm comprise a small proportion of its asset base. Trust and reputation can vanish overnight. A factory cannot." The difficulty of valuing firms that deal primarily with concepts and the growing size and importance of these firms may make the US economy more susceptible to Enron-type contagion, he warned.
The economy had recovered from the shock of Septemer 11th, he noted, and business and consumer confidence returned, "no doubt buoyed by successes in the war on terrorism". "Indeed, in the past several months, increasing signs have emerged that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm.
The appearance of these signs, in circumstances in which the level of the real federal funds rate was at a very low level, led the Federal Open Market Committee to keep policy unchanged at its meeting in late January, although it retained its assessment that the risks were tilted toward economic weakness," according to Mr Greenspan.
A key consideration in the assessment that the economy is close to a turning point was the behaviour of inventories. Their reduction would give an impetus to growth but this would be short-lived "unless sustained increases in final demand kick in before the positive effects of the swing from inventory liquidation dissipate".
"Most recoveries since World War II received a boost from a rebound in demand for consumer durables and housing from recession-depressed levels in addition to an abatement of inventory liquidation," Mr Greenspan said.
