Greenspan: Economy in recovery

Fallout from recession, scandals still being felt Economy expected to grow 3.5% to 3.75%

By Jeannine Aversa The Associated Press Published July 16, 2002, 11:05 AM CDT

WASHINGTON -- Federal Reserve Chairman Alan Greenspan told Congress today the economy is on the road to full recovery but will keep feeling the effects of last year's recession. Corporate executives should be held accountable to accurately state the financial condition of their companies, he said.

"The effects of the recent difficulties will linger for a bit longer but as they wear off, and absent significant further adverse shocks, the U.S. economy is poised to resume a pattern of sustainable growth," Greenspan told the Senate Banking Committee.

The markets remains volatile, however, and investors seem to take little comfort in promising second-quarter earnings reports or Greenspan's report. Stocks fell sharply in early trading, as the Dow Jones industrials plummeted by more than 170 points.

Delivering his semiannual report on the economy, Greenspan struck a more upbeat and reassuring tone than he had earlier this year.

He said he and his Fed colleagues now expect the economy this year to grow between 3.50 percent and 3.75 percent when measured from the fourth quarter of 2001. That's stronger than the 2.5 percent to 3 percent pace forecast in February.

But he also sounded a warning.

"Financial markets have been notably skittish of late and business managers remain decidedly cautious," Greenspan said.

To restore investor trust shaken by the accounting scandals, Greenspan said CEOs must be held accountable to accurately report on the financial condition of their companies and should be penalized for not doing so.

During questioning, Greenspan said elements in the Senate bill to combat corporate fraud passed Monday were "to the point."

Greenspan said checks and balances on corporate governance that worked well in the past might have been hurt by the go-go mentality of the 1990s that "arguably engendered an outsized increase in opportunities for avarice."

Greenspan's testimony comes as a startling wave of accounting scandals threatens to cause consumers and businesses to spend and invest less. It was deep cuts in capital spending that helped to push the economy into recession last year.

"Considerable uncertainties -- about the progress of the adjustment of capital spending and the rebound in profitability, about the potential for additional revelations of corporate malfeasance and about possible risks from global political events and terrorism still confront us," Greenspan said.

Against that backdrop and given that inflation has remained low, Fed policymakers have opted to hold short-term interest rates at 40-year lows at each of their four meetings this year.

"We have chosen to maintain that stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully," Greenspan said.

A growing number of economists believe the Fed will keep rates unchanged through the rest of the year. Low interest might motivate consumers to keep spending and businesses to invest, forces that would bolster economic growth.

Consumers, whose spending accounts for two-thirds of all economic activity, have been holding up despite the spotty recovery and the sour stock market, Greenspan said.

A growing number of economists believe the Fed will keep rates unchanged through the rest of the year, and they said that view was reinforced by Greenspan's remarks. Low interest might motivate consumers to keep spending and businesses to invest, forces that would bolster economic growth.

"The Fed will stand pat and will not be doing anything for awhile in terms of interest rates -- either lowering them or raising them," said Wells Fargo's chief economist Sung Won Sohn.

"He implied that the crisis of confidence in the stock market could go on for awhile, and we shouldn't expect any significant improvement in confidence any time soon," the analyst said.

Weak stocks have yet to crimp consumer spending because of offsetting boosts from low interest rates, solid appreciation in home values and extra cash from refinancing.

In contrast, business spending has remained weak, he said. Companies whose profits took a hit during the slump are reluctant to make big commitments in hiring and in investment until they are sure the recovery is here to stay.

Greenspan repeated his support for companies to treat lucrative stock options for top executives as a business expense. But he indicated that should be left to the private sector and should not be forced upon them by Congress.

Recent announcements by Coca-Cola Co. and others suggest that companies are moving in that direction on their own, he said.

Fed policymakers' forecast is for the nation's unemployment rate -- now at 5.9 percent -- to peak at between 5.75 and 6 percent later this year, an improvement from the Fed's earlier forecast and significantly below the 7.8 percent jobless rate hit in the last recession of 1990-91.

Inflation was forecast to be moderate this year, with consumer prices as measured by a price gauge tied to the gross domestic product to increase by about 1.5 percent to 1.75 percent, little changed from an earlier estimate. Copyright © 2002, The Associated Press