WASHINGTON — Federal Reserve Chairman Alan Greenspan gave strong marks for the economy’s future on Tuesday, but he said spending by consumers — often cited for rescuing the economy from last year’s brief recession and keeping things afloat since — will be tempered in the near term.
This story first appeared in the July 17, 2002 issue of WWD. Subscribe Today.
“Because consumer and residential expenditures did not decline during the overall downturn, there is little pent-up demand to be satisfied,” Greenspan said in remarks before the Senate Banking Committee. “Consequently, a surge in household spending early in this recovery is unlikely.”
Greenspan laid part of the blame for consumer belt-tightening on declines in the financial markets and their impact on 401k plans and other stock investments.
“The declines in household wealth that have occurred over the past couple of years should continue to restrain spending in the period ahead,” he said.
At the same time, Greenspan showed some optimism about consumers when he said they haven’t “retrenched” entirely, citing how interest rate incentives in June appear to have spurred car buying.
As far as corporate executives, Greenspan described them as having “dispirited attitudes” in the wake of the financial market declines and residual nervousness from last year’s falloff in business. He said increased global competition is also contributing to executive angst about the direction of business.
“Increased competition, while producing manifold benefits for consumers and for the economy as a whole, clearly makes individual firms’ operations more difficult,” Greenspan said.
However, he cited competitive benefits derived from technology and deregulation as “strengthening competition domestically.” Low interest rates, balanced inventories, low inflation and increased productivity are evidence that the economy remains on a sound footing, he said.
Referring to the corporate accounting scandals, Greenspan said “the effects of the recent difficulties will linger for a bit longer, but as they wear off and absent significant further adverse shocks, the U.S. economy is posed to resume a pattern of sustainable growth.”
He said the Fed is forecasting real gross domestic product for 2002 to grow at 3.5 to 3.7 percent over 2001, with the unemployment rate declining to around 5.5 percent by yearend. The GDP in the first quarter of this year was 6.1 percent, a surge pegged to replenishing of inventories after a weak 2001. Unemployment has been inching up in recent months and in June stood at 5.9 percent.
As far as interest rates, Greenspan said the Fed policy makers at their four meetings this year have chosen to hold off making changes to short-term rates that are at 40-year lows.
“We have chosen to maintain that stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully,” Greenspan said.
The financial markets continued on their downward path following Greenspan’s remarks as the Dow Jones Industrial Average ended the day at 8,473.11, down 166.08 or 1.9 percent. While the Nasdaq dropped less — down 0.5 percent to 1,375.26 — retail issues weathered steep declines as the S&P Retail Index receded 13.83, or 4.6 percent, to end the session at 284.81.
Meanwhile, as Greenspan spoke, the Fed released its latest economic indicator measuring U.S. manufacturing production in June and the capacity at which factories are working. Overall production on a seasonally adjusted basis was up 0.8 percent in June against May, which posted a 0.4 percent increase. Compared with last year, production was up 0.2 percent. The nation’s factories in June were operating at 76.1 percent capacity, up from May’s 75.6 percent.
Output at domestic textile mills in June posted its second consecutive monthly gain by increasing 0.6 percent, which was the same in May. Compared with last year, mill production in June was up 1.5 percent. Mills were operating at 77.9 percent capacity in June, up from 77.2 percent in May.
At U.S. apparel factories, production in June also increased for the second consecutive month, up 0.7 percent, compared with a 0.3 percent rise in May. However, over the year, apparel factory output last month was off 5 percent. Apparel factories last month were operating at 67.5 percent capacity, up from May’s 67 percent.