(KRT) — Amid a shower of surprisingly good news, the normally taciturn Federal Reserve Chairman Alan Greenspan said Thursday that the nation is en route to economic recovery.
“The recent evidence increasingly suggests that an economic expansion is already well underway,” Greenspan told the Senate Banking Committee, in unusually direct language. He sounded a more optimistic note Thursday than during his testimony before the House Financial Services Committee last week.
“It is unmitigated good news,” said Sherry Cooper, global economic strategist for the Bank of Montreal. “Greenspan has gone from saying ‘There will be a recovery’ to saying ‘This is a recovery.’”
If Greenspan is right, then the United States is pulling out of the mildest economic downturn since World War II.
For example, the Labor Department said new claims for unemployment benefits over the past month fell to 372,750. That is the lowest level since mid-August.
At the same time, worker productivity grew at a 5.2 percent rate in the final quarter of last year, much higher than the initial estimate of 3.5 percent. Rising productivity typically translates into economic growth, higher wages and corporate profits without inflation.
And manufacturing, in a deep recession for two years, is showing signs of vigor.
The nation’s jobless rate is to be released Friday, and in his testimony Greenspan did not alter the Fed’s forecast that unemployment could peak at 6 percent to 6.5 percent.
Cooper doesn’t believe it will rise that high. “But if it happens, it would be very short-lived,” she said, as a healthier economy creates jobs for displaced workers.
In any case, unemployment is a lagging indicator — it shows where the economy was, not where it is heading. Businesses often are reluctant to hire new workers at the end of a recession, so unemployment can rise for a time even after the economy begins to strengthen.
The Federal Reserve cut interest rates 11 times last year, bringing them to a 40-year low in an effort to revive the economy. This allowed homeowners to refinance mortgages and save money, cut the price of most other loans, and even allowed automakers to make loans at zero percent interest.
The good news on interest rates appears to be over, economists say, as the Fed worries more about inflation than about economic weakness. The Fed raises interest rates when inflation is a threat, to slow the economy.
“The next move is likely to be higher,” said Paul Kasriel, chief economist of Chicago-based Northern Trust. “I would say that by the end of June or mid-August, they are going to raise rates.”
The Fed meets again March 19, and the consensus among economists is that it will hold rates steady.
Kasriel said he believes the Fed is too pessimistic about the future unemployment rate. He said that depleted inventories of goods and stronger than expected auto sales all point to better times ahead. “We could very well top out at 5.8 percent” unemployment, he said.
Kasriel said the recession has not been gentle with everyone, however. Businesses bled money for much of last year, with the hemorrhaging increasing after the terrorist attack on Sept. 11. Financial reports for the first three months of 2002 will be out shortly, indicating whether corporate America’s losses have eased.
If companies are returning to profitability, or at least losing less money, they likely have the American consumer to thank. Consumer spending makes up about two-thirds of the nation’s economic activity. Consumers continued to buy homes and cars and clothes and a myriad of other goods, despite last year’s weakening economy. Greenspan said that strength continues.
“Sales have receded somewhat, but they have remained surprisingly resilient,” he said. “Other consumer spending appears to have advanced at a solid pace in recent months.”
But, as is typical for Greenspan’s public utterances, there is a caveat.
“The dimensions of the pickup remain uncertain,” he told the senators.