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Federal Reserve Chairman Alan Greenspan warned Congress Tuesday that U.S. industrial growth has slowed to a dangerous rate in the past few months and predicted a subsequent substantial economic slowdown in the next year.
“The past decade has been extraordinary for the American economy and monetary policy,” Greenspan said. “The synergies of key technologies markedly elevated prospective rates of return on high-tech investments, and significantly increased the underlying growth rate of productivity. … [But] economic growth [is] just exhibiting initial signs of slowing from what had been an exceptionally rapid and unsustainable rate of increase that began a year earlier.”
In his semiannual report to Congress, Greenspan warned of new Fed projections that show U.S. gross domestic product growth slowing to about 2 percent to 2.5 percent this year, and forecasted a “substantial slowdown, on balance, for the year as a whole.”
Greenspan’s report comes in sharp contrast to last July’s significant advance in gross domestic product, the broadest measure of the nation’s economic growth. The Federal Reserve Chairman noted the slowdown has triggered inventory imbalances by businesses. He also said consumer confidence has diminished.
However, Greenspan hinted at some developments that might help the U.S. economy recover from or stop any more significant slowdowns.
“Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth.” Greenspan said. “Expected earnings growth over the longer-run continues to be elevated. Prospects for high productivity growth should, with time, bolster both consumption and investment demand.”
Economists were split this week on the validity of Greenspan’s report. Some found his results overly pessimistic, while others identified with his findings.
“Greenspan is obviously trying to find a middle ground between sounding overly bearish on the economy and spooking consumer confidence, but still leaving the door open for further rate relief,” Doug Porter, senior economist at BMO Nesbitt Burns said on Reuters.com .
Following Greenspan’s report, members of Congress were given an opportunity to question the Federal Chair on President George W. Bush’s proposed across the board tax cut.
Greenspan rejected republican suggestions that a $1.6 trillion tax cut, made retroactive to the beginning of the year, could stop a recession.
“If a recession is going to happen, and I must say to you it is not happening yet, it is very unlikely to say that tax policy could be implemented quickly enough to prevent the downturn from occurring,” Greenspan said.
Previously, Republican senators had praised Greenspan’s support, which the GOP is using to promote Bush’s $1.6 trillion 10-year tax relief program. Democrats, however, are urging Greenspan to emphasize more his cautionary warnings about the uncertainty of long-range budget forecasts.
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