Greenspan Gives State of Economy

Thursday, July 20th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Federal Reserve Chairman Alan Greenspan said Thursday the economy is showing signs of slowing but indicated the Fed isn't ready to declare victory in its battle against inflation.

Presenting the Fed's midyear economic report to Congress, Greenspan said the economy seems to be cooling from its red-hot pace, a change many economists and members of the Fed believe is needed to prevent an outbreak of inflation.

``Aggregate demand may be moving closer into line with the rate of advance in the economy's potential,'' Greenspan told the Senate Banking Committee. Still, he said, ``We cannot yet be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist.''

Wall Street apparently was not spooked by Greenspan's worries about inflation. While he spoke, stock indexes were reversing Wednesday's losses, with the Dow Jones industrial average up 150 points and the Nasdaq adding 120 points.

Stock market volatility, rising interest rates and surging oil prices, which can reduce the amount of money people have to spend on other things, all have been factors in slowing growth, Greenspan said.

Still, he said, it's too early to draw definitive conclusions that the economy is on a sustained path of moderate growth.

Economists were encouraged. ``He's saying the economy is moving in the right direction but would like see to more movement in that direction,'' said Gary Thayer, chief economist for A.G. Edwards & Sons Inc. ``Still, he left the door open to further rate hikes if the economy should accelerate.''

Greenspan tied his worries to the tight labor market and fears that workers will demand big boosts in wages and benefits — costs that could be passed along to consumers as higher prices, meaning more inflation.

``Should labor markets continue to tighten, short of repeal of the law of supply and demand, labor costs eventually would have to accelerate to levels threatening price stability and our continuing economic expansion,'' Greenspan said.

Labor costs have been held in check by healthy gains in worker productivity, he said.

Productivity growth, the amount of output per hour of work, helps keep inflation low by allowing employers to pay for higher salaries through increased production rather than raising prices.

Even so, Greenspan said, inflation — including the ``core'' rate, which excludes energy and food — has worsened.

``Higher rates of core inflation may mostly reflect the indirect effects of energy prices, but the Federal Reserve will need to be alert to the risks that high levels of resource utilization may put upward pressure on inflation,'' he said.

``Energy prices may pose a challenge to containing inflation, but only to the extent that they cause people to worry about long-term prospects for inflation. That has not happened, he added.

Economists expect energy prices to ease in coming months on the expectation that oil-producing nation will boost output.

Separately, in the latest evidence that the Fed's interest-rate increases are slowing the economy, housing construction in June fell to its lowest level in more than two years, the Commerce Department reported Thursday.

Builders began new homes at a seasonally adjusted annual rate of 1.55 million units in June, a 3 percent drop from May's level. The decline left housing starts at their lowest level since May 1998, when they totaled an annual rate of 1.54 million units.

The economy, in its longest-ever streak of uninterrupted growth, has pushed the nation's unemployment rate down to 4 percent, near a three-decade low.

``The last decade has been a remarkable period of expansion for our economy,'' Greenspan said, adding that the Fed's interest-rate policies have sought to maintain the economic good times.

The Fed has raised interest rates six times over the last 13 months to slow economic growth and its main engine, consumer spending, in an effort to keep inflation in check.

``Maximum sustainable growth ... requires price stability. The Federal Reserve, I trust, will always remain vigilant in pursuit of that goal,'' he said.

As part of his testimony, Greenspan presented the Fed's revised economic forecast for 2000. The Fed predicted the gross domestic product will expand by around 4 to 4.5 percent this year, compared with 4.2 percent in 1999. For 2001, growth was projected to slow to around 3.25 percent to 3.75 percent.

And, the central bank forecast inflation will worsen slightly this year, with a GDP-related inflation gauge rising around 2.50 percent to 2.75 percent, compared to an increase of 2 percent last year.