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Greenspan: Recovery Likely to be Slow - 2002-02-28

U.S. central bank chief Alan Greenspan says he sees signs of recovery in a still sluggish U.S. economy. However, Mr. Greenspan told a congressional committee Wednesday that, while the economy may have turned the corner, recovery is likely to be slow.

The forces restraining a strong rebound, says Mr. Greenspan, are high levels of consumer and business debt and a sharp contraction in corporate profits. He says before the recovery gains momentum, unemployment, which stands at 5.6 percent, may rise even higher.

These cautious remarks from the long-serving Federal Reserve Board chairman were interpreted positively by financial markets. Analysts say stock prices rose because Mr. Greenspan gave no indication that consideration is being given to raising the short-term interest rates that the Fed cut 11 times last year.

Mr. Greenspan told the House financial services committee that without the terrorist attacks of last September, the economy would have made a quicker recovery. "Without September 11, the third quarter would have likely been no change [in growth] or maybe a small plus or a very small minus. And the fourth quarter probably would have done better," he said.

In fact economic activity fell by more than one percent in the July to September quarter. The current recession follows a record period of ten years of steady growth.

Mr. Greenspan says the financial scandal involving the collapse of the Enron energy trading company in Texas will have only a small economic impact. In his opinion, the net effect of this largest ever U.S. corporate bankruptcy will be positive.

"I think after the fact we'll look back on this Enron episode as a period when we put our corporate governance back on track," said Mr. Greenspan. "Which would not have happened without it in my judgment."

Enron collapsed in part because investors bid the stock price down after discovering that huge losses had been hidden for years in questionable off-balance sheet procedures approved by auditors.

Mr. Greenspan says it is the upper 20 percent of American households that have been hardest hit by the recession and the sharp two-year long decline in share prices.