- The Washington Times - Wednesday, February 11, 2004

Blue chip stocks yesterday rocketed to their highest levels since June 2001 after Federal Reserve Chairman Alan Greenspan said the central bank will be patient in raising interest rates, despite a “vigorous” expansion, as inflation and job growth remain low.

“The picture has brightened,” with output, productivity and profits soaring, Mr. Greenspan told the House Financial Services Committee, though “we’re still seeing very little evidence of new job hiring.”

The Dow Jones Industrial Average rose 124 points to a 2-year high of 10,738 on hopes the Fed will hold interest rates at their 40-year lows for months as it awaits a recovery in the job market.

Mr. Greenspan attributed the anemic job growth, despite the economy’s 6 percent growth rate in the second half of last year, to strong gains in worker productivity that have enabled businesses to produce more without adding jobs.

Also, he said, businesses are hesitant to add jobs because they are not sure whether the current robust growth will last.

“As opportunities to enhance efficiency become scarcer and as managers become more confident in the durability of the expansion, firms will surely once again add to their payrolls,” he said.

The difficulty of finding jobs has forced millions of job hunters to work for low wages or live on unemployment benefits, a trend that has sapped incomes and threatens consumer spending, Mr. Greenspan said.

“We are acutely aware of this,” he said, urging Congress to focus on retraining and educating laid-off workers. “It is very distressful to people.”

The Fed did not predict how many jobs will be added this year in its revised economic forecast, which foresees growth of between 4.5 percent and 5 percent. But it expects further declines in the unemployment rate to as low as 5.25 percent from 5.6 percent in January.

Mr. Greenspan said the 2.6 million job increase predicted for 2004 by the White House Council of Economic Advisers is “feasible” and even “most likely,” but only if productivity growth falls to more normal levels.

The high productivity gains, which recently have averaged about 5 percent, or several times the historical rate, are an important reason inflation has remained low, Mr. Greenspan said. And strong productivity has bolstered business profits, in a combination that is especially beneficial for the stock market.

“We obviously look with great favor on the efficiencies that are occurring, because at the end of the day that will elevate standards of living of the American people,” he said, but “it’s very clearly creating a significant shortfall in new hires.

“It’s only a slowdown in productivity or an incredible and unexpected rise in economic growth from an already high level that will create jobs.”

Mr. Greenspan saw several dangers for the economy in the months ahead besides a shortfall in jobs. A sharp spike in already high oil or natural gas prices could stifle growth, he said, and the rising tide of U.S. government debt looms heavily as a threat.

“Federal budget deficits could cause difficulties even in the relatively near term,” he said. “Should investors become significantly more doubtful that the Congress will take the necessary fiscal measures, an appreciable backup in long-term interest rates is possible.”

The rapidly mounting deficit, which is expected to be about $500 billion this year, will become a formidable problem for the United States by the end of the decade when the 77 million strong baby boom generation starts to retire, he said.

“Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level without debilitating increases in tax rates,” he said.

“Addressing the federal budget deficit is even more important in view of the widening U.S. current account deficit,” he said, which must be financed with inflows of $1.5 billion a day.

The central banks of Japan, China and other countries so far have been willing to continue purchasing large amounts of U.S. Treasury bills to finance the deficits, he said, but they “may become less willing” in the future.

Leanings toward protectionism in Congress, including efforts to prevent outsourcing of jobs to India, China and other countries, also pose a danger because they could make financing the record trade and budget deficits more difficult, he said.

Mr. Greenspan credited the dramatic decline of the dollar in the last two years for starting to turn around the trade deficit. He portrayed the dollar’s fall as largely benign thus far.

In a departure from past experience, the weaker dollar has not led to higher inflation, apparently because foreign companies selling in the United States have squeezed profits and used other strategies to avoid raising their prices, he said.

But he added that those extraordinary efforts, including dollar “hedging” by exporters to avoid losses from the falling dollar, may not be able to stave off price increases for American consumers much longer.

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