Federal Reserve Board chairman Alan Greenspan yesterday heralded the end of the U.S. recession, saying the economy is already in growth mode -- a significantly more optimistic view than the central banker offered just a week ago.
"The recent evidence increasingly suggests that an economic expansion is already well under way," Mr. Greenspan told the Senate banking committee yesterday.
Only a week ago, in his semi-annual report to the U.S. Congress, Mr. Greenspan was more cautious, referring to "a firming in economic activity."
Since then there has been good news from several fronts, including a report yesterday showing productivity rising at an annual rate of 5.2 per cent in the final quarter of last year, the steepest increase in 18 months. Last week the Institute for Supply Management said the manufacturing sector made a sharp turnaround in February for the first time in 18 months, and the service sector also climbed to a 15-month high. After Mr. Greenspan's speech last week the government reported that the economy expanded at an annual rate of 1.4 per cent in the last quarter of 2001.
"The economy is moving through a turning point," Mr. Greenspan said yesterday, a more optimistic view than a week ago when he said "the economy is close to a turning point."
The Fed is forecasting growth this year of between 2.5 and 3 per cent.
"Mr. Greenspan is clearly projecting significantly greater confidence that the economy has turned a corner," said David Wolf, an economist at RBC Dominion Securities. "The remarks appear not only to be bullish on the near-term outlook and timing of recovery, but also on the sustainability of recovery," he said.
Declining inventories are a sign that the economy is in better shape, Mr. Greenspan said, as "stocks in many industries have been drawn down to levels at which firms will soon need to taper off their rate of liquidation, if they have not already done so."
Even with the rosier view, the U.S. central bank is expected to leave interest rates unchanged until the fall of this year. "An increase of one-quarter of a percentage point in the third quarter of this year is still our call," said Craig Wright, chief economist at Royal Bank of Canada, "but there's some risk it could come earlier."
Because there is a lot of unused capacity in the economy, even with a snap back in growth, inflation is likely to remain low, he said.
The prospect of rising rates rocked financial markets yesterday, causing investors to unload U.S. stocks and bonds.
Since the beginning of last year the Fed slashed rates 11 times by a total of 4.75 percentage points, dropping the federal funds rate to a 40-year low of 1.75 per cent.
However, Mr. Greenspan cautioned that the economy will not heat up quickly. "An array of influences unique to this business cycle seems likely to moderate its speed," he warned.
Consumer spending will continue to rise, but "the potential for significant acceleration . . . will be more limited than in past cycles."
Although layoffs increased sharply and the unemployment rate climbed after the Sept. 11 terrorist attacks, both declined in January and initial claims for unemployment insurance have decreased, showing better labour market conditions, the Fed said. Last week new unemployment insurance claims fell to the lowest level since last July, the U.S. government said yesterday.
"Even if the economy is on the road to recovery, the unemployment rate . . . may resume its increase for a time, and a soft labor market could put something of a damper on consumer spending," Mr. Greenspan said.
Today's Labour Department report is expected to show an increase in the unemployment rate to 5.8 per cent in February from 5.6 per cent in January.