Dow Closes Down 202; Nasdaq Sheds 36
Wall Street Falls After War and Fed Talk
Jobless Claims Raise Economy Worries
Shares of McDonald's Corp. fall to Seven-year Low
Greenspan Urges Congress to Look at "Spending"
Greenspan Sees 'Depressing Effects'
The Associated Press
By Martin Crutsinger
September 12, 2002
Source
Greenspan cautioned that such problems as the terrorist attacks and the huge drop in stock prices were still having a lingering impact on growth as the country tries to mount a sustained recovery from last year's recession.
"The U.S. economy has confronted very significant challenges over the past year - major declines in equity markets, a sharp retrenchment in investment spending and the tragic terrorist attacks of last September," Greenspan told the House Budget Committee.
"To date, the economy appears to have withstood this set of blows well, although the depressing effects still linger," Greenspan said.
The Fed chairman said one area of major impact was on the federal budget, which has seen projections of a decade of surpluses of more than $5 trillion replaced with the return of huge deficits.
The Congress Budget Office is now predicting that the deficit for this budget year, which ends on Sept. 30, will hit $157 billion after four straight years of surpluses, the longest such stretch that the budget has been in the black in seven decades.
Greenspan said the sharp fall in stock prices, which have been tumbling since the spring of 2000, was a major reason that government revenues have declined and he said this impact "will likely damp tax revenues relatives to earlier expectations for some time."
Greenspan said the success Congress had been able to achieve in attacking an entrenched deficit problem was in danger of being lost unless lawmakers retained tough rules that require increases in permanent benefit programs or reductions in taxes to be offset by spending cuts or tax increases in other areas.
"If we don't preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard work could be squandered," Greenspan told the budget panel. "Failure to preserve them would be a grave mistake."
Those pay-as-you-go rules, which were implemented in 1990, are set to expire at the end of this month.
"The budget rules worked far better than many skeptics, myself included, had expected," Greenspan said. "The pay-go rules changed the way policy-makers analyzed fiscal policy proposals. Rather than focusing solely on the benefits of a proposal, policy-makers were required to recognize the costs as well."
Greenspan made no specific mention in his testimony about what the Fed would do next with interest rates. So far this year, to deal with all the shocks that have hit the economy, the Fed has kept interest rates at a 40-year low of 1.75 percent for the overnight bank lending rate.
The Fed's next meeting is Sept. 24 and many analysts believe that the central bank will continue to leave rates unchanged even though Wall Street got excited last month about the possibility of additional rate cuts.
In recent weeks, many economists have revised upward their growth forecasts for the current quarter, some by a full percentage point to 3.5 percent, which would be far above the 1.1 percent growth rate of the April-June quarter.
"August was a strange month. We started off thinking the wheels had come off the economy ... and then the data seemingly changed," said economist Joel Naroff of Holland, Pa., who predicted "volatile, contrasting indicators" would continue for some time as the economy regained its footing.
Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said he believed that Fed would leave rates alone for the rest of the year despite the weakness discussed in the latest Fed survey of economic conditions in its 12 regions released on Wednesday.
"We had a fairly soft economy in the summer as a result of the stock market crash and ensuing uncertainties facing consumers and businesses," he said. "But the stock market has been doing better of late and manufacturing orders are starting to show improvement."