By Glenn Somerville
WASHINGTON - Federal Reserve Chairman Alan Greenspan was set to outline for Congress Wednesday how he sees the U.S. economic recovery evolving as global markets waited with bated breath for fresh hints of encouragement. The world's most influential central banker was scheduled to unveil his biannual analysis of the economy's condition before the House Financial Services Committee at 10 a.m. EST and to take questions afterward. His testimony comes against a backdrop of mostly positive recent economic indicators that, on balance, augur well for the future. Numbers out early this year prompted him to advance a cautiously optimistic view on Jan. 24, when he said the economy was "at this point turning, as best I can judge." And analysts think the data that have trickled out since will strengthen the optimistic tone further, although the Fed chairman is likely to hold to his habitual caution.
The issue for economists and investors is how much more strongly Greenspan might present the case for a recovery and whether he will deliver any hints about when the Fed might look at unwinding some of 2001's 11 interest rate cuts -- although such tightening is still seen many months in the future. "I would argue that he's going to talk about both signs of improvement to the economy and I think he's going to talk about some of the lingering downside risks," said Richard Berner, chief economist at Morgan Stanley Dean Witter in New York.
PICK UP THE BEAT
But the tone, said Berner, likely will be "distinctly more upbeat (than Jan. 24) because we've had a lot of news since then that I think makes things look a whole lot better." Although most economists believe the recession has ended, many are predicting a less-than-robust recovery. Atlanta Fed President Jack Guynn said Monday that the climb out of recession will be slower than past rebounds, with housing and consumer spending -- which have not softened as much as is typical in most downturns -- unlikely to offer as significant a "kick" as they have in the past. "I think the economy's going to return to sustained positive growth by the third quarter of the year," Guynn told a Rotary Club audience in Nashville, Tennessee. "The recovery, though, is likely to be more moderate than we're accustomed to seeing. That's because consumer spending and housing are not likely to provide the usual kick we've seen coming out of previous recessions and because there's still considerable uncertainty surrounding investment spending." On the plus side, factory orders have shown signs of reviving as bloated inventories have been drawn down and consumer spending remained surprisingly resilient over the holiday shopping season. The United States slipped into recession last March, according to the National Bureau of Economic Research, which dates business cycles. Any suggestion from Greenspan that he considered the recession over would be a powerful stimulant for global investors.
As Tuesday ended, the U.S. dollar was posting robust gains against other key currencies on anticipation that Greenspan would at least say the U.S. economy was on the road back to growth, even if he declined to declare the recovery under way. Rumors swept markets that the Fed chief, known for his care in assessing the economy's potential, might choose to deliver a stronger-than-usual assessment in order to make the point that the worst was past and that the future had brightened. But there also are issues looming for the economy that, while not directly influencing activity, are a force in determining its future. Lawmakers were certain to raise the issue of "Enronitis" -- uncertainty stemming from concern about accounting deficiencies in the case of bankrupt energy supplier Enron Corp. -- as a potential broader worry. Those worries took some of the zip out of U.S. stock markets Tuesday, as prices edged lower on nagging accounting concerns as well as on a report that consumer confidence softened in February. The Conference Board in New York said its consumer confidence index fell to 94.1, its lowest level since last November, after two months of gains. The lower reading implies a slower pace of recovery. "You can't look at these numbers and say things are going to be booming going forward," said economist Kevin Logan of Dresdner Kleinwort Wasserstein in New York.
ENRON A POLITICAL FOOTBALL
Analysts said that while lawmakers undoubtedly would try to bring Enron into focus, Greenspan was likely to prove cagey. "I'm sure he's going to get asked about Enron and ... various proposals about improving auditing procedures, improving disclosure, (and) transparency," said Berner. "And I think he's got opinions on all those things and I'm sure he's going to be happy to talk about them generically -- that is without reference to a specific company or situation." Treasury Secretary Paul O'Neill, who heads a task force that includes Greenspan and which is looking into how to tighten corporate governance rules after the Enron collapse, took a similar tack Monday. He told a Chicago audience that chief executives of corporations should fully disclose accurate operating results or face legal consequences, without specifically mentioning Enron.