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		Home Page Mortgage News You Can Use Greenspan Says `Prospects Are Good' for Sustained Growth in U.S. Economy Feb. 11 (Bloomberg) -- The U.S. economy may grow as much as 5 percent this year, the strongest pace since 1984, and push the unemployment rate lower, Federal Reserve Chairman Alan Greenspan said. Low inflation will allow the central bank to remain ``patient'' before raising interest rates. ``The picture has brightened,'' Greenspan said in the text of testimony to the House Banking and Financial Services Committee. ``The prospects are good for sustained expansion of the U.S. economy.'' In addition, ``employment will begin to grow more quickly before long as output continues to expand.'' The ``central tendency'' forecast of Fed policy makers is that low borrowing costs for corporations and consumers, profit growth from productivity gains, and rising confidence should help the economy expand as much as 5 percent this year, Greenspan said. That's a quarter-percentage point faster than the Fed's July forecast for 2004. Treasuries rose after Greenspan's comments suggested the central bank isn't close to raising its target interest rate, which it has kept at 1 percent, the lowest since 1958, since June. The benchmark 10-year note due in 2013 rose 9/16 point, pushing the yield down 7 basis points to 4.04 percent at 11:29 a.m. in New York. Companies are likely to continue spending and increase production, aided by higher profits and improved balance sheets brought on in part by their ability to refinance debt at lower interest rates, the chairman said. Unemployment The Fed has been able to hold down rates because of slack use of resources and weak job growth. Even with faster growth, hiring has been slow because ``stunning'' productivity gains ``have obviated robust increases in business payrolls,'' Greenspan said. Some 1 million jobs have been lost since the recession ended in November 2001, and 2.286 million jobs have been lost since the start of President George W. Bush's presidential term in January 2001, according to the Labor Department's survey of businesses. The Fed's estimate is that the unemployment rate would average 5.25 percent to 5.5 percent in the fourth quarter. The Fed's benchmark overnight lending rate stands at 1 percent, the lowest in almost 46 years. In their most recent policy statement, on Jan. 28, Fed officials said they can be ``patient'' in considering increasing rates because of ``quite low'' inflation and ``resource use slack,'' a formulation Greenspan repeated today. With the Fed's preferred measure of inflation, the core personal consumption expenditures index minus food and energy, rising 0.7 percent for the 12 months ended December, Greenspan said ``the Federal Reserve can be patient in removing its current policy accommodation.'' Budget Discipline Still, ``the evidence indicates clearly that such a policy stance will not be compatible indefinitely with price stability and sustainable growth,'' the Fed chairman said. ``The real federal funds rate will eventually need to rise toward a more neutral level.'' Greenspan also warned Congress that a lack of federal spending discipline could eventually lead to a rise in long-term interest rates. ``Should investors become significantly more doubtful that the Congress will take the necessary fiscal measures, an appreciable backup in long-term interest rates is possible as prospects for outsized federal demands on national saving become more apparent.'' Greenspan said budget restraint combined with market flexibility unhindered by protectionism should aid the adjustment in the current account deficit, which may have reached $550 billion, or 5 percent of gross domestic product last year. The current account deficit should narrow further in 2004 as forward hedges foreign companies have purchased expire, he said. ``The currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States,'' Greenspan said. `Transition' Year The Fed chairman said 2003 marked a ``transition'' from ``subpar'' economic performance to a ``more vigorous expansion.'' He pushed off concerns about a credit bubble or excesses in financial markets, and noted that delinquency rates on consumer loans and home mortgages declined last year. ``Our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit,'' Greenspan said. Rising stock prices have also contributed to the expansion, Greenspan said. ``However, history shows that pricing financial assets appropriately in real time can be extremely difficult and that, even in a seemingly benign economic environment, risks remain.'' Even though the ratio of household debt to income has increased, Greenspan said, rising home and stock prices also increased household net worth. Investment Spending One of Greenspan's preferred indicators of business confidence is capital expenditures, according to his previous speeches. Investment spending by businesses on equipment and software rose 10 percent in the fourth quarter, following a 17.6 percent gain in the third quarter. Business investment spending led the economy into the 2001 recession, falling 16.4 percent in the second quarter of that year. ``The improved balance sheets and strong profits of business firms, together with attractive terms for financing in open markets and from banks, suggest that financial conditions remain quite supportive of further gains in capital spending in coming quarters,'' Greenspan said. He called the gains in U.S. worker output per hour ``stunning.'' For all of last year, productivity rose 4.2 percent following a 4.9 percent gain in 2002. The two-year average was the largest since 1950-1951, and above the 1976-1995 average gain of 1.4 percent per year. Productivity ``To a surprising degree, firms seem able to continue identifying and implementing new efficiencies in their production processes and thus found it possible so far to meet increasing orders without stepping up hiring,'' Greenspan said. As these opportunities become scarcer, and as business confidence improves, ``firms will surely once again add to their payrolls.'' In the past half year the economy created just 184,000 jobs. Last month, a fewer-than-forecast 112,000 jobs were added and manufacturing positions declined for the 42nd consecutive month. The Fed's central tendency forecast is for real gross domestic product to expand between 4.5 percent to 5 percent from the fourth quarter of 2003 to the final quarter of this year, Last July, policy makers estimated real 2004 GDP growth of 3.75 percent to 4.75 for that period. The Fed expects the personal consumption expenditure price index -- their preferred inflation measure -- to rise by 1 percent to 1.25 percent in the fourth quarter of 2004 over the year earlier period. Last July, the FOMC members expected inflation to rise 1 percent to 1.5 percent for that period. Still, a ``sharp spike'' in oil or natural gas prices is a risk to the economy, he said. The monthly jobless rate will average 5.25 percent to 5.5 percent in the final quarter of this year, the Fed's monetary policy makers predicted. That compares with a forecast of 5.5 to 6 percent presented by Greenspan to Congress last July.   Back to Original Article: Mortgage News You Can Use   Continue with: Yield declines on Treasury notes That Big Fat Budget Deficit. Yawn. Dow Soars 66 After Greenspan Report Experts: Bush Jobs Forecast Optimistic Dollar to hit US import prices eventually-Greenspan U.S. Treasuries Economic growth fuels stronger world oil demand-IEA Dollar Drops on Greenspan Remarks
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