- The Washington Times - Thursday, July 19, 2001

Federal Reserve Chairman Alan Greenspan yesterday said the economy is likely to remain weak, vulnerable and held back by deep downturns in manufacturing and technology for months to come.
"We're not out of the woods," he told the House Financial Services Committee, citing a "litany of risks" that include rapidly dissipating growth in Europe, Asia and Latin America, a recession in business profits, a battered stock market and rising joblessness that threatens consumers.
The Fed chairman's testimony was unusually clear that the central bank will keep cutting interest rates until signs of a recovery emerge. He declined to predict when that recovery would occur but expressed hope that signs would appear by year's end and be clearly visible next year.
"Uncertainties surrounding the current economic situation are considerable," he said, although there are "tentative" signs that the fall in auto manufacturing and some technology sectors has hit bottom.
"The rate of deterioration is slowing," he said. Economic reports that had been "unrelentingly negative for quite a long period of time have now turned mixed," in what could be "the first signs that something of a positive nature is developing."
"What is really quite remarkable is that with this extraordinary litany of negative elements that have been going on day by day, month by month, the economy is still standing," he said. "Economic activity has held up remarkably well in the face of a difficult adjustment."
Mr. Greenspan extolled the resilience of American consumers and the enigmatically strong housing market, which currently are the only sources of growth keeping the economy out of recession. Growth has hovered around 1 percent since the end of last year.
"If you have a stable consumer and housing, that's going to support the total system because that's a very big part of the economy."
Consumers, while stretched with historically high levels of debt, are getting support from steadily rising incomes, falling energy prices and interest rates, tax cuts and the rising value of their homes, he said.
"There is some fundamental support in the system," he said, although consumers continue to be threatened by losses in their stock portfolios and a rise in the unemployment rate that could hit 5 percent this year.
Committee Chairman Michael G. Oxley, Ohio Republican, noted "a number of heartening signs" that suggest "we have turned the corner" and are entering a recovery.
"Energy prices, particularly gasoline prices, are lower. We no longer have daily crisis reports from California about blackouts. The markets, while still volatile, also are up over their levels of four months ago, and consumer confidence remains high."
The relatively pessimistic tone of Mr. Greenspan's remarks spawned another mild drop in the stock market yesterday. Interest rates declined dramatically in the bond market, however, in anticipation of further Fed rate cuts this summer.
The Nasdaq Composite Index fell 51 points, or 2.5 percent, to 2,016, while the Dow Jones Industrial Average fell 37 points to 10,570, spurred on by gloomy earnings reports from computer chip maker Intel Corp. and media giant AOL Time Warner.
Mr. Greenspan was particularly bleak in discussing the poor profits outlook for businesses, which has been the reason behind thousands of layoffs announced by companies since the fall.
"Pressures on profit margins have been unrelenting," he said, primarily because of the crunch from rising labor costs and high energy prices.
While some relief from those pressures appears to be in prospect, he said, the sharp appreciation of the dollar in recent weeks has created a new drag on the earnings of American companies operating overseas.
Mr. Greenspan sparred with committee Democrats over a variety of issues from the minimum wage to the stimulative effect of the tax cuts, which he said should be evident by the end of the year.
Democrats have been disgruntled with the Fed chairman's support for Bush economic policies.
He opened the way for a major tax cut by throwing his support behind it in January, and he has doggedly backed the administration's efforts to increase energy supplies.
The Fed chairman pointedly rejected charges that he favors the rich and multinational corporations over average consumers, and he strongly took issue with Democrats' assertions that the country is facing a "crisis" of affordable housing.
Mr. Greenspan said repeatedly that housing has been one of the brightest spots in the economy, and that its strength is primarily because of the influx of Democratic constituencies into the market.
"Let's look at the positive side," he said. "We've had a significant increase in the proportion of families who own homes. A disproportionate part of that rise has been minorities and lower-income groups. Indeed, a goodly part of the reason why housing is doing as well as it is, is immigrants buying homes."

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