Greenspan warns of economy slowdown

Greenspan delivered his latest assessment to the House Financial Services Committee as President Bush tried to rally the nation behind his plan for major tax cuts and for a budget blueprint that he says will shrink government debt while protecting important programs.

At a factory in Beaver, Pa., Bush said Greenspan's downbeat remarks were "all the more reason to accelerate the tax cut ... as soon as possible.'' Bush wants to cut individual tax rates retroactive to Jan. 1.

While repeating his support for tax cuts — which first got his blessing to on Jan. 25 — Greenspan refrained like before from endorsing a specific plan.

The Fed chairman also reiterated his interest in seeing Congress consider imposing a trigger mechanism that would trim government spending or tax cuts if projected budget surpluses aren't as large as currently estimated. Bush doesn't like the idea of putting any conditions on tax cuts.

In his economic outlook, Greenspan blamed much of the economy's weakness on an effort by businesses to cut back quickly on production in the face of falling sales.

Although companies are working hard to bring excess inventories into better alignment with demand, Greenspan said, the process may take more time.

Excess inventories "built up in 1999 and 2000 have engendered a retrenchment that has yet to run its full course,'' Greenspan said, a departure from testimony he delivered to the Senate Banking Committee on Feb. 13.

Before Greenspan testified at the House hearing, the government reported economic growth in the final three months of 2000 slowed to an annual rate of just 1.1 percent, its weakest performance in more than five years.

Some economists said Greenspan's remarks revealed more concern about the state of the economy than was evident in his Senate appearance two weeks ago.

"Clearly, Mr. Greenspan and the members of the Federal Open Market Committee consider the threats heavily weighted toward more slowing. They are prepared to act promptly,'' said Joel Naroff, economist with Naroff Economic Advisors.

Economists said, however, it remains unclear whether the Fed will cut interest rates before its next meeting on March 20, as Wall Street investors hope, or wait until the regular meeting to do so. Either way, economists believe the Fed will cut rates by another half-point, following up on reductions of that size on Jan. 3 and Jan. 31.

Greenspan said the central bank prefers to act on interest rates at scheduled meetings. But, he added: "We've also shown over the years that when we perceive actions are required between meetings, we have never hesitated to move.''

Wall Street investors, however, were hoping Greenspan would have offered a more dire outlook for the economy, which analysts believed would have greatly raised the odds of a rate cut before March 20. The Dow Jones industrial average dropped 141.60 points to close at 10,495.28.

While clearly expressing worries about the economy, Greenspan mentioned encouraging signs.

"The exceptional degree of slowing so evident toward the end of last year, perhaps in part the consequence of adverse weather, seemed less evident in January and February,'' he said.

And, for now at least, Greenspan said: "The weakness in sales of motor vehicles and homes has been modest, suggesting that consumers have retained enough confidence to make longer-term commitments.''

Still, the continued erosion in consumer confidence, which fell for a fifth consecutive month in February to its lowest point since 1996, worries the Fed. "Changes in consumer confidence will require close scrutiny in the period ahead, especially after the steep falloff of recent months,'' Greenspan said.

Greenspan has said one of the biggest factors in determining whether the faltering economy will slide into recession is the state of consumer confidence during the slowdown.

In his testimony two weeks ago, Greenspan said despite a decline in consumer confidence, it remained at a level that always had been consistent with economic growth. That line had been edited out of yesterday's remarks.

He said the best thing policy-makers can do to bolster confidence is to provide as objective an appraisal of how the economy is doing as possible. "The one thing I know you can't do is try to spin the economy one way or the other. It doesn't work,'' he said.

Greenspan also said it was too early to judge whether the recent drop in the stock market could cause a recession. Gains or losses from such investments tend to affect how wealthy people feel and their willingness to spend. Consumer spending accounts for two-thirds of the nation's economic activity.

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