- The Washington Times - Monday, February 10, 2003

WASHINGTON, Feb. 10 (UPI) — Federal Reserve Board Chairman Alan Greenspan appears before the Senate Banking Committee on Tuesday to testify on the state of the economy, as concerns about the nation's growth prospects intensify.

But while the continued slump in the stock market and weakness in the job market remain worrisome, Wall Street analysts argue that the single biggest threat to economic growth is a political factor, namely the potential war against Iraq.

As a result, even though Greenspan's twice-annual assessment of the economy will be closely monitored by investors, it's unlikely that he will provide much comfort, given that geopolitical risks are likely to be the biggest hurdle to potential growth.

"February may be influenced more by the possibility of war with Iraq than any single economic factor," said Joel Naroff of Naroff Economic Advisers.

Indeed, a war in the Middle East might cost U.S. taxpayers up to $200 billion, as estimated by former White House economic adviser Lawrence Lindsey, who left his post at the end of the year. Since then, however, director of the Office of Management and Budget Mitch Daniels reduced the estimate to $50 billion.

Regardless of the total price tag, however, it is clear that a war would only widen the U.S. budget deficit, which is already expected to reach a record high in the next fiscal year beginning October at $304 billion.

Moreover, the gap is expected to hit $307 billion the following fiscal year — and neither estimate includes possible war costs.

Still, some analysts expect the Fed chief to be relatively upbeat on the economic outlook.

"We expect (Greenspan) to strike a cautiously optimistic tone … that tack is supported by the data over the past week, which added to the evidence that the economy is pulling out of its 'soft spot', in our view," said UBS Warburg economist James O'Sullivan.

He pointed to improvement in the non-manufacturing sector and the slight increase in the Institute for Supply Management's manufacturing index, with export orders picking up. Also, the labor market has improved slightly.

Still, the growth rate of gross domestic product remains weak, with the fourth quarter expanding by only 0.7 percent, and with war uncertainties looming, investors largely expect the financial markets to remain lackluster.

But given that there are some bright spots in the economy, most analysts don't expect the Fed to cut interest rates any further, given that the key federal funds target rate is already at its lowest level in over 40 years at 1.25 percent.

Policy-makers of the Federal Open Market Committee stated at the end of their meeting late last month that while they were concerned about geopolitical risks and higher oil prices, "the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time."

Said Naroff: "That does not sound like an overly worried Fed, does it? So, if the Fed is not panicking, should we? No."

Admittedly, Greenspan usually avoids political comment, adhering to the Fed's stance of commenting solely on monetary policy. But given the timing of his testimony this time around, many analysts expect him to go beyond basic economics and discuss possible war costs — and comment on the widening deficit, which he has made clear he opposes.

Greenspan's testimony will come on the heels of the president's annual economic report, which is compiled by the White House's Council of Economic Advisers, which was sent to Capitol Hill on Friday. In the report, President George W. Bush urged lawmakers to adopt his stimulus package proposal, which includes a $674 billion plan that is largely dependent on tax cuts to bolster economic growth.

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