As Federal Reserve chief Alan Greenspan prepares for an appearance on Capitol Hill this week, he will be hard-pressed to find much evidence of a postwar economic bounce that he and other economists have been expecting. On the other hand, he can take encouragement from the fact that the economy appears to have skirted the danger of a “double-dip” recession.
Greenspan's testimony before a House panel Wednesday — his first substantial public comments on the economy since before the outbreak of war in Iraq — will be watched closely for his latest views on a likely tax-cut package, the economic threat posed by SARS and the timing of a long-awaited rebound. The appearance is particularly unusual because it comes just six days before a meeting of Fed policy-makers that some economists believe could result in a decision to cut interest rates again. Most analysts believe the Fed will keep policy steady, but Greenspan and other members of the rate-setting panel generally refrain from any public comments on the economy in the week before their scheduled meetings.
Poised for growth
While most of the latest data on the economy have been fairly bleak, so far nothing has emerged to contradict the central position of Greenspan and other leading economists that the economy is poised for gradual improvement that will become more pronounced in the second half of the year.
“Greenspan is the leader of the group that believes war worries and geopolitical uncertainties have been a significant detriment to economic opportunities,” said Steve East, chief economist for Freidman Billings Ramsey, an investment bank. “So I think we will hear more of what we have heard in the past … that the stage is set for a rebound in growth.”
For early evidence of a potential postwar rebound, analysts point to a decline in oil prices, a modest rally in the stock market and relatively lower interest rates on corporate bonds. Friday’s report of a larger-then-expected increase in consumer sentiment in late April also supported the view that consumer spending could grow soon from recent anemic levels.
On the flip side, initial claims for jobless benefits shot up to their highest level in more than a year this week, indicating that jobs continued to drain from the economy in April. Gross domestic product, the broadest measure of the economy, came in at a weaker-than-expected 1.6 percent rate for the first quarter, offering few signs of strength outside the housing sector.
“The data haven’t been all bad,” said Ethan Harris, chief U.S. economist at Lehman Bros. “Sprinkled in with some pretty ugly stuff have been some good reports. We’re in an anemic growth period. … It’s two steps back and one step forward.”
But given the quick and relatively uncomplicated victory of U.S. forces in Iraq, Harris and others said the economy has almost certainly avoided a second recession on the heels of the one that began in March 2001 and ended nine or 10 months later by most reckonings.
Worries in Washington
Even if the economy is not technically in a recession, the extremely weak job market has got to be making elected officials nervous in Washington, from President Bush down. Don Straszheim of Straszheim Global Advisors pointed out that in the past 11 presidential election cycles, the incumbent party has lost every time there was less than 3 percent job growth in the two years leading up to a vote and five out of six times when there was less then 5 percent job growth.
Given the loss of nearly 500,000 jobs in February and March, it would take “an economic miracle” for Bush to achieve even the lower 3 percent milestone by November of next year, Straszheim said.
So it is no surprise that Bush has stepped up his campaign for a new round of tax cuts that could offer an economic boost leading into the election year. Bush visited Ohio this week, applying pressuring on moderate Republican Sen. George Voinovich who has sided with Democrats in favor of a a smaller package that would do less damage to the federal budget deficit.
The centerpiece of Bush’s proposal, an elimination of the tax on corporate dividends, is making little headway in the Senate, where members seem far more interested in passing a more populist package with noticeable, near-term impact for average taxpayers. In an interview with CNBC Friday, Republican Sen. Charles Grassley, chairman of the Finance Committee, revived the idea of cutting income taxes retroactive to Jan. 1, which would have the effect of a midyear raise in take-home pay for most workers.
Certainly Greenspan will be asked to comment again on the tax package, which he famously disparaged in February, saying he was “not as yet convinced” that any fiscal stimulus was needed. East, of Friedman Billings Ramsey, said he suspected Greenspan “may soften his opposition without going whole hog in endorsing it.”
At the very least that could raise the question of whether Greenspan has made a political deal with the Bush administration. Greenspan’s appearance before the House Financial Services Committee was announced just a day after Bush made a surprise announcement that he intends to reappoint Greenspan to a fifth term as chairman next year.
But economic conditions have not changed so dramatically in two months for Greenspan to be able to come forward with an enthusiastic endorsement of a tax-cut package. “He could come out and be a little more sympathetic to a smaller package,” said Harris. “He certainly is not going to be shifting gears for some big cut.”