Economy to pick up despite negative data, says Greenspan

RECENT disappointing data on employment and production have not altered the likelihood that the US economy is poised to grow at a faster pace, Federal Reserve chairman Alan Greenspan said.

Interest rates are low enough to spur consumer and business spending, Mr Greenspan suggested in testimony prepared for the Joint Economic Committee.

“Looking ahead, the consensus expectation for a pick-up in economic activity is not unreasonable, though the timing and extent of that improvement continue to be uncertain,’ Mr Greenspan said. “The stance of monetary policy remains accommodative and conditions in financial markets appear supportive of an increased pace of activity,” he said.

The Standard & Poor’s 500 Index has risen 3% over the last month.

On May 6, Fed policy makers voted to keep the benchmark overnight bank lending rate at a 41-year low of 1.25%, warning of an increased risk to the economy that might require additional cuts in interest rates.

The central bankers warned that a “substantial fall in inflation” would be “unwelcome”, a statement Mr Greenspan repeated yesterday.

The US economy is experiencing disinflation, or a fall in the rate of inflation. The so-called core rate of the consumer price index rose 1.5% in the 12 months ended April, the smallest gain since 1966. Mr Greenspan yesterday called recent data on employment and productivity disappointing. The unemployment rate rose to 6% last month and industrial production fell 0.5%. Factory capacity in use declined to 74.4% in April, the lowest since June 1983.

At the same time, productivity rose 2.3% in the first quarter of the year compared with the same period a year ago. A drop in energy prices since the end of the Iraq war is “another positive factor in the economic outlook”, Mr Greenspan said. However, this months rise in oil prices, close to $30 a barrel is a “worrisome trend if continued”, he added.

Crude oil prices, which had fallen to $25 a barrel for the US benchmark West Texas Intermediate crude from a high of more than $33 in March, have risen to $28 a barrel. US gross domestic product expanded at a 1.6% annual rate in the first three months of 2003, following growth of 1.4% in the fourth quarter of last year, the slowest half-year since the second half of 2001. GDP will expand at 2.4% this year, according to economists surveyed by Bloomberg News.

“The economic information received in recent weeks has not, in my judgement, materially altered the outlook. Nonetheless, the economy continues to be buffeted by strong cross-currents,” Mr Greenspan said.