Washington, Feb. 11 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan is likely to deliver an optimistic outlook on the U.S. economy to Congress today, saying growth is poised to accelerate once investors, consumers, and corporate leaders know what will happen in Iraq. The Fed chairman testifies before the Senate Banking Committee beginning at 10 a.m. Washington time, the first of two annual appearances before Congress to deliver the central bank's take on monetary policy and the economy. He's likely to be asked about President George W. Bush's 690 billion tax cut package, and about what, if anything, the Fed might do to spur growth. Analysts expect him to sidestep direct comment on Bush's program and to say there's little more monetary policy can do for an economy that's showing signs of increased strength. ``What they have been saying is that once Iraq gets behind us, we should be doing a lot better,'' says James Glassman, director of U.S. economic research at J.P. Morgan Securities Inc. ``I think the evidence is on their side.'' For the past eight months, Fed officials have said in speeches and policy statements that a lack of confidence is more to blame for restraining growth than some fundamental problem in the economy.
In mid-2002, corporate accounting scandals and the resulting 31.3 percent plunge in the stock market through the second and third quarters hurt business and consumer confidence, the Fed said. Now, war tensions with Iraq get the blame for weak business spending, low stock prices, and anemic 0.7 percent growth in the fourth-quarter, the slowest in five quarters.
Iraq Question
Fed officials don't know how a war with Iraq will affect the economy, and Greenspan is likely to deflect questions about how the central bank will respond to a conflict. Last week, Fed Vice Chairman Roger Ferguson said ``the impact of war on the U.S. economy is unpredictable'' because ``a war is one of those things one simply can't model.'' Oil prices have jumped on war concerns, with the price of oil on the spot market up 13 percent since the first of the year. Greenspan, however, has said that the price of oil is less important to the economy than it was, because ``the use of energy generally, is 20 to 25 percent less intensive per dollar of'' gross domestic product than a decade ago, he told business economists in England last year. If oil prices fall, that would provide a boost for an economy that Fed officials have repeatedly said is poised to accelerate. High productivity growth is boosting corporate profits and keeping consumer incomes buoyant, even as a dozen cuts in interest rates over the past 25 months have underpinned overall demand.
Positive Signals
After a slow fourth quarter, economists surveyed by the Blue Chip Economic Indicators see growth picking up to a 2.7 percent annual growth rate this quarter, and quickening to 3.8 percent in the year's final three months. Greenspan can note that manufacturing, one of the most cyclical parts of the economy, expanded for a third straight month in January, according to the Institute for Supply Management's Purchasing Managers Index. The unemployment rate dipped in January to 5.7 percent, down from 6 percent in December, and the troubling decline in investment spending by businesses may have hit bottom in the third quarter of last year.
Borrowing Costs
Corporate borrowing costs are also lower. The gap between the yield on an index of Treasury securities and an index of corporate bonds of similar average maturity narrowed almost a full percentage point from 2.72 percentage points on October 10 to 1.85 percentage points as of Jan. 31. U.S. 10-year notes fell on expectations Greenspan will highlight growth in the economy, eroding demand for the haven of government debt. The 4 percent note due in November 2012 declined 5/32, or $1.56 per $1,000 face amount, to 100 3/32 at 7:06 a.m. in London. Its yield rose 2 basis points to 3.99 percent. A basis point is 0.01 percentage point. Just how the economy performs over the next 18 months is critical to Greenspan's legacy. His chairmanship of the Board of Governors expires in June, 2004. Greenspan and other Fed officials have argued the central bank isn't to blame for the stock bubble of the late 1990s. What's not clear is whether the bubble's deflation has weakened the overall economy in a lasting way.
Losses in Stocks
The Standard and Poor's 500-stock index fell 46.5 percent in the three years ending 2002, and has dropped another 5 percent so far this year. Spending on equipment and software has declined for the past two years. The ratio of inventory to sales is hovering around the lowest levels in a decade, reflecting better inventory controls and also skepticism on the part of businesses about whether the economy has definitely turned up. ``There is a sense in the Fed that they are waiting and watching, not only with respect to a war with Iraq, but also with the economy,'' said Nancy Roman, managing director at G7 Group Inc., a political and economic consulting firm whose clients have more than $100 billion under management. ``This really is a time of great uncertainty.'' Analysts expect much of the question and answer period with senators to be taken up with partisan wrangling over President George W. Bush's 10-year, $690 billion tax cut proposal. The plan is already under attack from Democrats and some academic economists.
Bush Tax Plan
``It is an inadequate stimulus, it leads to higher deficits and it worsens the problems of inequity,'' Nobel-prize winning economist Joseph Stiglitz told reporters yesterday. Greenspan has said he favors some tax cuts in principle, such as eliminating the double-taxation of dividends. In January 2001, his comments in favor of fiscal stimulus helped the Bush team to convince Congress to pass a $1.35 trillion tax cut plan four months later. More recently, Greenspan has also added that the budget process needs some kind of discipline to prevent budget deficits from soaring. ``History suggests that an abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth, and force harder choices upon us in the future,'' Greenspan told member of Congress in September. Not all analysts think the Fed chairman will come out so cautious on the tax proposal given the economy's need for faster growth. ``I think he will support the tax cuts and further stimulus and won't be as lukewarm as he was recently,'' said Mickey Levy, chief economist at Bank of America Securities. Levy said Democrats and Republicans are in general agreement on health care, defense, and Social Security spending. ``People can yap all they want about fiscal responsibility, but there aren't that many degrees of freedom.'' //www.quote.bloomberg.com