Hopes of a quick recovery in the US were dampened yesterday by news that the economy grew much more slowly in the first three months than previously estimated. Gross domestic product, the total output of goods and services, grew at an annual rate of just 1.3 per cent from January to March - not the 2 per cent the government predicted last month - as business investment fell steeply.
Mr Alan Greenspan could not be accused of irrational exuberance about the short-term prospects in a much-anticipated assessment of the US economy given on Thursday evening at a black tie dinner in New York. The Federal Reserve chairman suggested the worst was yet to come, and hinted that a sixth rate cut in as many months might be necessary to lift the economy.
"The period of sub-par growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response," Mr Greenspan said.
The US Commerce Department underlined his words with a report yesterday that new orders for bigticket manufactured goods plunged in April. Demand for aircraft, cars, computers and a host of other goods slumped. Sales of existing homes fell 4.2 per cent in April, raising concerns that the strong housing market was succumbing to the slowdown.
However, the key index of consumer sentiment published by the University of Michigan showed an increase to 92.0 in May from 88.4 in April, ending a sharp slide that began late last year and suggesting that consumers may weather the economic slowdown, despite rising unemployment.
In his first major pronouncement on the US economy since mid-March, Mr Greenspan warned that bloated inventories had not yet been brought under control and consumer sentiment remained "fragile". He noted, however, that prices were contained, giving leeway to easing rates further without worrying about inflation.
Referring to the Fed's aggressive cutting of inter-bank rates by 250 basis points in five months, Mr Greenspan said it should provide "substantial support for a strengthening of economic activity later this year".
He added that the long lags of monetary policy meant the effect "will take time to strengthen financial portfolios and spill over into demand for goods and services". This was taken by Wall Street to signal that the Fed had almost done enough and the market should perhaps not expect more than a 25 basis point reduction at the next Fed policy board meeting on June 26-27th. "Fed Chairman Greenspan held the door open to further easing in his remarks," said JP Morgan economist Marc Wanshel.
"But he hinted that he feels most of the Fed's work has been done and that the pace of easing is likely to slow appreciably in the absence of convincing new evidence that economic weakness is accelerating. Given our expectation of weak data between now and June 26-27th, we would still expect the Fed to ease next month."
While Mr Greenspan warned that bloated inventories were only belatedly being brought under control, the Commerce Department reported that businesses had shifted an unexpectedly large quantity of excess goods out of warehouses.
Inventories fell by $18.9 billion (#22.01 billion) at an annual pace in the first quarter, nearly three times greater than anticipated and the largest since a $42 billion decrease in the first three months of 1983. The first-quarter decrease subtracted 3 percentage points from GDP but if maintained will boost new factory production in the months ahead.
"We are getting to the point where production cuts have eaten away enough at surplus stockpiles and, if spending starts to pick up at all, manufacturers are going to have to start producing goods again and maybe even hire more workers," said Mr Gary Thayer, chief economist at AG Edwards.
The pressure on corporate profit margins was "unrelenting", Mr Greenspan said. A report yesterday said after-tax profits fell in the first quarter by 3.1 per cent, following a 4.3 per cent drop in the fourth quarter.
