The New York Times 2/13/01
Washington -- While warning that the economy still faces substantial risks, Fed Chairman Alan Greenspan said Tuesday that the United States is not in a recession and that the current downturn could prove to be as short as it is sharp.
Testifying before the Senate Banking Committee less than two hours after the government reported that retail sales in January were stronger than expected, Greenspan said that the "exceptional weakness so evident in a number of economic indicators toward the end of last year" had apparently not carried fully into the new year.
"At the moment, we are not," Greenspan said when he was asked whether the economy was in recession.
He did not directly address whether the central bank is likely to continue with its campaign of aggressive interest-rate reductions at its next policy-making meeting on March 20. The Fed cut short-term interest rates twice last month, by half a percentage point each time, in an effort to keep the abrupt slowdown from bringing an end to the long business expansion.
But Greenspan's analysis of economic conditions suggested that further rate reductions are likely, if perhaps not so certain as assumed by investors and analysts in recent days.
The response to his testimony in the financial markets was muted.
Stocks retreated in late trading from their modest gains earlier in the day. The Dow Jones industrial average closed down 43.45 points, or 0.4 percent, to 10,903.32, while the technology-weighted Nasdaq composite index dropped 61.93 points, or 2.5 percent, to 2,427.73.
Bond prices slipped, and the yield on the 10-year Treasury note, which moves in the opposite direction, rose to 5.06 percent in late trading on Tuesday from 5.04 percent on Monday.
A number of the questions from members of the Senate Banking Committee centered on Greenspan's endorsement of a tax cut. Greenspan said a tax cut could help the economy in the unlikely event that the nation was entering a prolonged recession.
But he cast doubt on the Bush administration's contention that passing a tax cut quickly would help the economy recover from a short, sharp downturn.
"It is most unlikely that if we go through a regular recession that any tax cut can be enacted sufficiently quickly to alter the probability of whether we will, indeed, find ourselves in a recession," Greenspan said.
In his semi-annual report on monetary policy, Greenspan said the long-term outlook remained bright because the technology revolution had led to a surge in the economy's productive capacity that showed no signs of abating.
Should productivity growth remain robust, the Fed chairman said, it could wipe out some of the long-term problems facing the country, even the projected insolvency of the Social Security system in coming decades.
"What we are learning with these changing productivity numbers is that a major alteration in how we view our future, how we view Social Security, how we view our fiscal affairs" will be necessary, Greenspan said.
But the same technological forces that have led to a resurgence in the growth rate of productivity, or output per hour, have also made the economy more prone to abrupt, though temporary, downturns, he said.
Because businesses can monitor demand for their products minute by minute, they can adjust their own output almost instantaneously to reduce inventories of unsold goods and unused supplies. And because they can see better what is happening across the economy, different businesses and industries increasingly tend to respond in concert to the same data.
"The result is not only a faster adjustment, but one that is potentially more synchronized, compressing changes into an even shorter time frame," Greenspan said.
When individuals see the economy slowing suddenly, he said, they respond, quite naturally, with concern and even fear, compounding the economic impact.
"While technology has quickened production adjustments, human nature remains unaltered," Greenspan said. "We respond to a heightened pace of change and its associated uncertainty in the same way we always have: We withdraw from action, postpone decisions and generally hunker down until a renewed, more comprehensible basis for acting emerges."
For now, though, consumer confidence remains at levels that suggest that the economy will continue to grow, he said, and Wall Street analysts continue to predict strong corporate earnings over the long run. And, he said, productivity growth appears to be holding up well, suggesting that the economy could rebound quickly.
"If the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited," he said. "Before long in this scenario, excess inventories would be run off to desired levels."
In this more volatile atmosphere, Greenspan said, the central bank "has seen the need to respond more aggressively than had been our wont in previous decades" to slowing growth and deteriorating economic and financial indicators.
Earlier Tuesday, the government's report on retail sales provided some initial evidence that the economy might be starting to revive after its recent slowdown. The Commerce Department said retail sales rose 0.7 percent in January, slightly higher than expected, after edging up a weak 0.1 percent in December. Excluding volatile automobile sales, retail sales rose a strong 0.8 percent last month after being unchanged in December.