US economy hits 'soft patch'

US Federal Reserve Chairman Alan Greenspan warned Congress today that shocks from falling share prices and worries about war with Iraq are dimming business prospects, even though the economy has proven “remarkably resilient” over the past year.

Greenspan said the Fed’s decision last week to cut interest rates by a larger-than-expected half point was the central bank’s response to the growing dangers.

He repeated the Fed’s view in its rate cut announcement that the central bank believed the economy would be able to pull out of the current weak period.

But Greenspan told the Joint Economic Committee there was no doubt that a number of forces were holding back growth currently.

He cited in particular the fallout from revelations about corporate accounting scandals, the continued reluctance of businesses to increase their investment spending and “heightened geopolitical risks.”

“Over the last few months, these forces have taken their toll on activity and evidence has accumulated that the economy has hit a soft patch,” Greenspan told the panel.

Greenspan said all of these problems were creating uncertainty among consumers, who have been the driving force in the current recovery, and among businesses.

“Households have become more cautious in their purchases, while business spending has yet to show any substantial vigour,” Greenspan said.