- The Washington Times - Saturday, January 12, 2002

The economy is showing tentative signs of reaching bottom after nine months of recession, but rising joblessness, slumping profits and other problems may prolong the downturn, Federal Reserve Chairman Alan Greenspan said yesterday.
"Recent signals about the current course of the economy have turned from unremittingly negative through the late fall of last year to far more mixed," he said, in a sign the economy may be at a turning point and heading toward recovery. "But I would emphasize that we continue to face significant risks."
Consumer spending has become more subdued and could be further restrained this year by rising unemployment, which hit 5.8 percent last month, as well as the loss of trillions of dollars in stock wealth in the past two years.
Also hurting consumers, Mr. Greenspan said, is a recent rise in long-term interest rates that will dampen the most robust sector of the economy: home sales and refinancings.
Businesses also show few signs of recovering from the major setbacks in profits and investment spending that tripped the economy into recession a year ago, he said in an address to a business audience in San Francisco.
As if to illustrate Mr. Greenspan's point about the continued threat of joblessness, Ford Motor Co. yesterday announced it would cut 35,000 jobs in one of history's biggest layoffs. The move is part of a sweeping reorganization aimed at restoring profitability to the troubled car company. Sears, Roebuck Co., Merrill Lynch and other major employers also have announced big layoffs in recent days.
Mr. Greenspan noted that the pace of layoffs appears to have slowed in recent weeks, but no one knows whether that trend will continue. Businesses have achieved much of their cost savings in recent months through layoffs and may have to continue cutting jobs for some time to restore profitability.
"The unemployment rate may well continue to rise for a time, and job losses can be expected to put something of a damper on consumer spending," he said.
Businesses have made great strides in reducing a record $100 billion or more in inventories of cars, televisions and other surplus products in recent months, enabling hard-hit manufacturers to prepare for at least a modest recovery in production, he said.
But a recovery cannot take hold unless spending by consumers and businesses picks up along with production, Mr. Greenspan said, and business spending in particular cannot grow unless profits return.
"Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery," he said.
The economy has made an "impressive" comeback from the "extraordinary shocks" caused by the September 11 terrorist attacks and general stock market rout of the past two years, avoiding some of the harshest aftereffects predicted by many observers, Mr. Greenspan said.
"If the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a relatively mild downturn," he said. "To be sure, a great deal of real economic pain has been felt over the past year and a half. But imbalances have not been allowed to fester."
One reason to be optimistic that the economy will turn for the better this year is the substantial stimulus in place as a result of the $200 billion in tax cuts and spending increases for defense, education, homeland defense and other areas passed by Congress last year, Mr. Greenspan said.
"Despite the failure of Congress to enact further tax cuts and spending increases, the continued phase-in of earlier reductions in taxes and the significant expansion of discretionary spending already enacted should provide noticeable short-term stimulus to demand," he said.
"Some of the stimulus has likely been offset" by increases in 30-year mortgages and other long-term interest rates since mid-November, he said.
But the increase in rates "largely reflects the perception of improved prospects for the U.S. economy," rather than worries about the disappearing federal surpluses, he said.
Another saving grace for the economy has been the buoyant housing sector, he said. The substantial increases in home values being enjoyed by the two-thirds of Americans who own homes has helped to partially offset the loss of more than $4 trillion of stock market wealth since March 2000.
The stock market staged a strong comeback from three-year lows reached after the terrorist attacks, but it remains down substantially from the all-time highs hit in the spring of 2000. Yesterday, the market was mildly depressed, as Mr. Greenspan's remarks were not as upbeat as many had hoped.
The robust home market, in contrast, posted record sales last year, even in the midst of a recession, and has been an important source of financial strength for consumers, Mr. Greenspan said. Americans have been able to tap into their rising home values through cash-out refinancings, home-equity loans and other means.
Cash-out transactions reached a frenzied $75 billion pace last summer, providing a substantial boost to consumer spending, but they likely have tailed off since then because of the rise in mortgage rates, he said.
One source of strength for consumers falling energy prices has been somewhat exaggerated, he said.
The precipitous drop in gasoline and home-heating fuel prices provided a boost of $50 billion to consumer-purchasing power in the second half of last year, but that was a one-time event and no further big declines in energy prices are expected, he said.

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