Greenspan Re-commits To Growth

By John S. McClenahen Possibly hoping that his remarks would be a self-fulfilling prophecy, Federal Reserve Chairman Alan Greenspan was guardedly optimistic on the future of the U.S. economy when he testified before the House Financial Services Committee on July 15. He even mentioned "stirrings" in new orders, which could lead to increased production and a new round of capital spending. Greenspan acknowledged that a lot of "ifs" remain, however. Among them are unused production capacity, the strength of final sales, the level of business profits and a "pervasive sense of caution" in the wake of corporate governance scandals that seems to have caused companies to put strengthening balance sheets ahead of significantly increasing hiring and spending. Nevertheless, Greenspan pointedly signaled that the Federal Reserve, through its interest-rate-setting Federal Open Market Committee (FOMC), is committed to growth. "With the target [federal] funds rate at 1%, substantial further conventional easings could be implemented if the FOMC judged such policy actions warranted," he said. "The FOMC stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to satisfactory economic performance." Although one month's data do not constitute a trend, just before Greenspan testified, there was an encouraging economic sign. Retail sales rose 0.5% to $310.4 billion in June, the U.S. Commerce Department reported. The increase, which was higher than the 0.4% rise economists generally expected, was "reasonably broad based," observes Maury Harris, chief U.S. economist at UBS Investment Research, New York. "It included a jump in the sales of building materials . . . as well as strong gains in clothing, sporting goods, food and health, and personal care items," he notes. What's more, the rising consumer confidence that June's increased spending reflects seems to be carrying over into July, adds Harris. That's crucial to a faster U.S. rate of recovery from recession, since consumer spending accounts for about two-thirds of U.S. GDP.

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