This partial transcript of Special Report with Brit Hume, March 7, 2002 was provided by the Federal Document Clearing House. Click here to order the complete transcript.

Other guests and topics for March 7, 2002 included:
• Teri Schultz: President Bush injects a double dose of hard-nosed American diplomacy into the current violence in the Middle East
• Bret Baier: Fierce fighting in the mountains south of Gardez brought round-the-clock U.S. air strikes and more American troops into battle
• James Rosen: Orrin Hatch requests a one-week delay on the Senate
Judiciary Committee's vote on the judicial nomination of Charles Pickering
• Jim Angle: Without specifically mentioning Enron, President Bush calls on regulators to crack down on corporate executives who mislead investors and employees
• Greg Burke: Pakistani investigators are still looking for seven men in connection with American journalist Daniel Pearl's kidnapping and killing
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BRIT HUME, HOST: Nobody in Washington, indeed, perhaps nobody in the history of Washington, is more careful in his public pronouncements than Federal Reserve Chairman Alan Greenspan. So, it was noteworthy today that Greenspan made substantive changes in his view of the economy from what he said only a week ago.

Last week before a House committee, Greenspan spoke of a "subdued recovery beginning soon." Today before a Senate committee, the phrase "beginning soon" was gone. And Greenspan spoke of  "an economic expansion already well under way."

For an analysis of an economy that seems to have caught a lot of people off guard, we turn to Diane Swonk, senior vice president and chief economist at Bank One in Chicago, from which she joins us tonight.

Diane, it's nice to have you.

DIANE SWONK, CHIEF ECONOMIST, BANK ONE: Good to be here.

HUME: Now, what happened here? I'm not trying to belittle Alan Greenspan. Tons of economists predicted a sort of low and slow recovery here. And it seems to have gained steam sort of suddenly and caught people by surprise.

SWONK: Well, I think one of the things is, first of all, Greenspan's speech, as he was speaking it was literally getting out of date.

HUME: You mean a week ago.

SWONK: A week ago. As he was speaking, we were getting economic information, some of which he may have had, some of which he probably didn't have on the manufacturing sector that was very, very encouraging.

Not only have we now got a consumer that has defied all gravity and continued to defy gravity in the first quarter, it now looks like the manufacturing sector is really finally on firm footing, not only from a production standpoint, picking up in production, but it looks like equipment investment. That one factor that he's been harping on that we need for future productivity growth is going to turn positive in the first quarter next month.

HUME: Now, do we know why that is? Do we have any idea what caused that? It was an unanticipated change. It is suddenly — I guess it's everything from washing machines to heavy equipment, right, that...

SWONK: Exactly.

HUME: What is causing the demand for that to grow?

SWONK: Well, some of it is just sheer fact that dealers are just plain out of stock. So, some of it is a dealer restocking of inventories. We are hearing that that out in the field that dealers are calling in orders now, and shipments are being made. The only way to get anything is to actually order it. So, it's actually showing up that way.

We have also seen some comeback in computers as well. There's some new technology out there driving that. But also, we're seeing — the bottom line is there is at some point in time our stuff gets out of date. And the technology curve here is getting shorter and shorter. And that's helping us also.

HUME: You said the technology curve is getting shorter and shorter. That means that you have to renew and buy new computer equipment and other high-tech equipment much sooner than you used to have? Is that what you're saying?

SWONK: Exactly. And the third factor, and I think one that we just can't ignore, is that all of a sudden we're starting to see a flurry of profit announcements to upward revisions for the year 2002. People are feeling much more positive even though CEOs are still somewhat negative. In general, we've begun to see the GMs of the world, which actually faced deflation, not only have been...

HUME: You say deflation. Explain what that would mean to a company like that.

SWONK: Their prices are going down. Car prices are going down. Those are one of the things that are going down in the economy, not widespread. But GM is facing deflation. No pricing power, yet they have revised up the forecast for the year 2002. They think they're going to have very strong profits. They've been increased from a buy to a hold by Merrill today. I think these are very important...

HUME: Increased from...

(CROSSTALK)

SWONK: ... from a hold to a buy, I'm sorry about that.

HUME: That's all right.

SWONK: But it's very important because we are starting to see Whirlpool, Home Depot, Pier One, all these increases in profits out there. And who in their right mind would say they think their profits are going to be better this year unless they really believed it in the wake of Enron?

HUME: Right.

SWONK: And I think these are very important because profits are what drives investment.

HUME: Well, this all raises an intriguing question now because if we look back — if I'm not mistaken, the classic definition, sort of loose definition of a recession, is two consecutive quarters, that's to say three-month periods, of negative economic growth. Now, the numbers for the third quarter of 2001, we had minus 1.3. Second quarter, there was growth of, what...

SWONK: 0.2.

HUME: ... yes, a little growth. And then the first quarter now, 1.3. So we only had one last year. And then the — yes, 1.4 in the fourth quarter. So it went from minus 1.3 to 1.4. Now it's expected that it will grow. We'll have growth in the first quarter of this year, right?

SWONK: We'll have a lot of growth in the first quarter of this year. In fact, it's not hard to get over three percent in the first quarter of this year.

HUME: So, with only one quarter of negative growth over the last five or six quarters, is it fair to say there never really was a recession?

SWONK: Well, it certainly is debatable. I think one of the things that is absolutely clear, no matter whether you think there was a recession or not, it would not have happened — and I think the Fed has stood by this, and we're now seeing other people stand by it — it would not have happened absent the events of September 11.

Even NBER, which dates our recession...

HUME: That's the National Bureau of Economic Research.

SWONK: Bureau of Economic Research.

HUME: Right.

SWONK: They're the ones who date our recessions. They said in their statement originally they didn't think — we would have likely avoided it absent the events of September 11 because the losses in the economy, the declines weren't enough to justify a recession, status is the definition, until after September 11. The problem is it didn't last very long. I mean, it really is a remarkable testimony of this economy, how strong it was in the wake of the events of September 11.

HUME: Does this fact that we seem to have come out of this or really never got far into it, does this owe anything to the tax cuts that were passed last year?

SWONK: Certainly, that's one factor. I think a bigger factor is lower energy prices, mortgage refinancing, the lags in monetary policy. I mean, I all is part of a very large puzzle that suggested that growth. In fact, Greenspan said last week growth would have accelerated in the fourth quarter absent the events of September 11 quite dramatically.

And I think now we're looking at some of the payoffs to — you know, it takes a year for the full effects of Fed policy to work. Look at where we are. And we have got tax cuts up 16 percent, tax returns are right now. That's clearly adding consumer spending at the moment right now too.

HUME: So it sounds as if the tax cut may have made some difference. It's likely to make more looking forward, correct?

SWONK: Absolutely. The question is, how much do we need? And nobody knows that for sure. But this economy looks like it has some awfully nice momentum. We have now got a fiscal stimulus package six months after the fact. I wish they would have done it in the beginning. I'm a little ticked that it took them this long to figure their situation out. I'm glad it isn't too large. But on the other side of it...

HUME: You mean it isn't too large because you are afraid that if it were, the economy would — the Fed would get scared and start to raise rates again?

SWONK: And we're already — the markets today are already worried that the Fed is going to be normalizing. I mean, 1.75 percent interest rate is just not consistent with a three to four percent economy if that's what we end up getting into.

HUME: Three or four percent growth.

SWONK: Three or four percent growth. So I think it's really quite interesting that we finally get a stimulus package six months after the fact. And it is sort of — unfortunately, it's business as usual in Washington, too much too late. I hope that it is just going to be adding to an economy that needs it. But in reality, I think it is going to be adding to an economy that is already well on its way to expansion. And there are other issues that need to be addressed in fiscal policy that are probably more important.

HUME: All right, Diane Swonk, I think I understand everything. And I'm grateful to you for that. Thanks very much. Nice to have you.

SWONK: Great.

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