Mr Alan Greenspan warned yesterday that the US economy had hit a "soft spot" and that the fall-out from the stock market slump and concern about war with Iraq had diminished business prospects.
But in testimony to Congress, the US Federal Reserve chairman said the US economy had proven "remarkably resilient" over the past year, growing at an average rate of 3 per cent since the fourth quarter of 2001, despite all the setbacks since September 11th.
The US President, Mr George Bush, later chided Mr Greenspan for his terminology. "He uses the words 'soft-spot', I use the word 'bumping along'," Mr Bush said after a White House cabinet meeting. He added that his tax cuts had "worked well" in the first three quarters to stimulate the economy, and urged that Congress make them permanent.
Mr Greenspan said the central bank decided to cut interest rates by half a point last week in response to the growing dangers, and that this "should prove helpful as the economy works its way through this current soft spot".
He told the joint economic committee in Congress: "Although economic growth was relatively well maintained over the past year, several forces have continued to weigh on the economy: the lengthy adjustment of capital spending, the fall-out from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks.
"Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch.
"Households have become more cautious in their purchases, while business spending has yet to show any substantial vigour. In financial markets, risk spreads on both investment-grade and non-investment-grade securities have widened."
In the business sector, there had been few signs of any appreciable vigour, said Mr Greenspan. "Uncertainty about the economic outlook and heightened geopolitical risks have made companies reluctant to expand their operations, hire workers, or buy new equipment. Executives consistently report that in today's intensely competitive global marketplace it is no longer feasible to raise prices in order to improve profitability."
While consumer spending - which drives two-thirds of the world's biggest economy - had slowed because of falling share prices, concern about jobs and the terrorist threat, the slump had "not been as bad as some had earlier feared it might", he said.
He also credited tax cuts, as well as extended unemployment insurance and deep discounts offered by many businesses for bolstering consumer spending. Stimulated by the lowest mortgage interest rates in decades, home sales and housing starts had also remained strong, he said.
With consumer confidence in the US at a nine-year low, a survey of US chief executives published yesterday produced a gloomy assessment for next year.
Almost two-thirds of chief executives surveyed by the Business Roundtable in New York forecast that real GDP would rise less than 2 per cent in 2003.
