Greenspan says economy has regained some traction | NevadaAppeal.com

Greenspan says economy has regained some traction

MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) – Federal Reserve Chairman Alan Greenspan said Wednesday the economy has “regained some traction” after a late spring slowdown that was triggered by a sharp spike in oil prices.

Greenspan’s moderately upbeat forecast came as the nation entered the final two months of an election battle in which President Bush and Democratic challenger John Kerry have widely different views on how the economy is performing at present.

Normally, incumbent politicians are unhappy if the Federal Reserve is raising interest rates close to an election.

However, this time around, many private economists believe the Fed is probably helping the Bush campaign by signaling an intention to keep raising interest rates because such a stance supports the administration’s view that the economy has begun to emerge from the recent slowdown.

In his testimony before the House Budget Committee, Greenspan said that two key indicators, consumer spending and housing construction, bounced back in July after a weak performance in June.

“Economic activity hit a soft patch in late spring after having grown briskly in the second half of 2003 and the first part of 2004,” Greenspan told the committee.

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“The most recent data suggest that, on the whole, the expansion has regained some traction,” he said.

The Fed has boosted the federal funds rate, the interest that banks charge on overnight loans, from a 46-year low of 1 percent to 1.5 percent in the past two months.

Economists believe the Fed will keep raising rates at a measured pace at coming meetings, including another quarter-point increase on Sept. 21.

Greenspan made no comments in his prepared remarks on the direction of interest rates.

He said that this year’s slowdown “in activity no doubt is related, in large measure, to this year’s steep increase in energy prices.”

The big jump in energy prices acts like a tax on consumers, leaving them less money to spend on other items.

In answer to questions, Greenspan told the panel that if it had not been for the jump in oil prices this year, he believed the country would “still be seeing some very strong growth.”

Greenspan refused, however, to quantify how much the oil price increase had reduced growth, saying it had affected the economy in a number of ways such as depressing consumer confidence.

A big slowdown in consumer spending pushed overall economic activity down from a robust 4.5 percent rate of growth in the first three months of this year to a much slower 2.8 percent growth rate in the second quarter.

The slowdown has been accompanied by a significant slowing in job growth as well, although there was a bit of a rebound in August with payrolls rising by 144,000.

The state of the economy has become a debating point in the presidential campaign with Bush contending that his tax cuts averted a more serious recession in 2001 and are helping to promote a sustained recovery currently.

Kerry contends that the tax cuts went primarily to the wealthy and have left the country with record budget deficits.

In response to questions, Greenspan said he believed the Bush tax cuts were well-timed to help the economy rebound from the last recession. But he agreed that there were other things the government could have done that might have provided an even bigger boost to growth.

Greenspan, as he has in the past, urged Congress to reinstate budget rules that were in effect through much of the 1990s that required any tax cuts or increases in benefit programs such as Social Security to be paid for either by tax hikes or spending cuts in other areas.

Greenspan warned that Congress must act with more urgency to address the country’s long-term deficit problems before the retirement of the baby boom generation at the end of this decade.

“As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill,” he told the budget panel. “If, on further study, that possibility turns out to be the case, it is imperative that we make clear what real resources will be available so that our citizens can properly plan their retirements.”

Greenspan has suggested in the past that Congress consider raising the retirement age for receiving full Social Security benefits or adopting a less generous annual cost-of-living adjustment as two ways to trim payments to baby boomers.

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