Greenspan's semiannual testimony to Congress came amid growing concern that the accounting scandals and the continuing stock-market slide could torpedo a fragile economic recovery. Greenspan acknowledged the risks, but he stressed that the fundamentals of the U.S. economy, including low inflation and high productivity, remained strong.
"All the evidence that we've been able to accumulate in recent weeks suggests that the economy is improving," he told the Senate Banking Committee. "It's pretty much in line with our expectations. . . . What that suggests is that it's going to take a while, but that things are gradually improving as the negatives continually become less."
His comments provided little relief to the slumping stock market. The Dow Jones industrial average finished down for the seventh consecutive day, dropping 166.08 points to close at 8,473.11. The tech-heavy Nasdaq composite index slipped 7.36 points to 1,375.26.
The latest evidence of a recovery came from a Federal Reserve report yesterday that industrial production rose 0.8 percent in June, the sixth straight monthly increase. The Fed's Board of Governors, which Greenspan heads, predicted the economy would grow at about a 3 percent annual pace in the second half of this year and by 3.5 percent to 4 percent in 2003.
Greenspan indicated that the Fed was not planning to raise interest rates anytime soon. It will wait for signs that the forces inhibiting growth have dissipated enough to allow the economy to recover, he said.
"Considerable uncertainties . . . still confront us" in three areas, he said. They are global political events and terrorism, the potential for revelations of accounting fraud at more companies, and an uncertain outlook for business investment to pick up.
On accounting reform, Greenspan placed particular emphasis on changing the behavior of errant chief executive officers. He backed stiff penalties for CEOs who fail to report the financial condition of their companies accurately, saying deterrence could go a long way toward eradicating fraud.
"We will get past this corporate governance issue," Greenspan said. "It is most unfortunate and, I think, very regrettable, and it has had negative effects, unquestionably. But beneath it all is still a very soundly functioning system, as best I can see it."
The uncertainty about a hoped-for resumption of business investment suggests that any economic recovery will be less robust than those after previous recessions.
In part, that is because the recession was relatively mild. Consumers reduced spending only moderately, so there isn't likely to be a sudden surge in spending to propel a recovery.
Business investment did collapse, and economists are looking to a rebound in investment to boost economic growth. But with the strength of the recovery uncertain, business executives are cautious about new spending, Greenspan said.
A tempered recovery would not create many jobs quickly and would be in sharp contrast to the boom times of the late 1990s.
Contact Ken Moritsugu at kmoritsugu@krwashington.com.
