Offering his most optimistic assessment in more than a year, Federal Reserve Chairman Alan Greenspan told Congress Thursday that the U.S. economic recovery appears to be "already under way" and essentially declared the recession over.
In a rare revision of testimony delivered last week to the House Financial Services panel, Greenspan told the Senate Banking Committee: "The recent evidence increasingly suggests that an economic expansion is already well under way, although an array of influences unique to this business cycle seems likely to moderate its speed."
The Fed chief, who was clearly more decided in his assessment that the U.S. recession had ended, added that he saw "encouraging" signs in recent days that final demand was strengthening.
But he retained a note of caution, telling lawmakers during questioning that the recovery would "almost certainly" not log the growth rates of rebounds from past recessions -- which he said were typically around 7 percent on average. He also said business spending was a cause for concern.
"Investment expenditures in the communications sector, where the amount of overcapacity was substantial," Greenspan added, "as yet show few signs of turning up, and business investment in some other sectors, such as aircraft, hit by the drop in air travel, will presumably remain weak this year."
"The recent evidence increasingly suggests that an economic expansion is already well under way, although an array of influences unique to this business cycle seems likely to moderate its speed," Greenspan said.
Experts See Rate Increases on the Horizon
The increase in his optimism signaled to many economists that the Fed could use its meeting on March 19 to shift its public stance on economic risks to say they are balanced between economic weakness and rising inflation rather than one weighted toward the threat of economic softness.
Such an shift could potentially be a prelude to an eventual rise in interest rates, which some economists say could come as soon as mid-year.
"He was very cautious in his previous testimony. Obviously, he made the decision that that no longer reflected his view," said economist Peter Kretzmer at Bank of America in New York.
"This decision is a pretty good signal that the balance of risks statement (on March 19) is going to be altered from one favoring economic weakness to a balanced view," Kretzmer said.
Only a week ago, Greenspan said U.S. economic activity was just "beginning to firm," while also offering a list of caveats about consumer spending and business investment.
In his testimony on Thursday, the Fed chief was clearly more decided in his assessment that the U.S. recession, which began last March, had ended. Greenspan said he saw "encouraging" signs in recent days that final demand was strengthening, while warning that "the dimensions of the pickup remain uncertain."
Bonds fell after the testimony was released, stocks were mixed with blue-chip shares softer and the technology-heavy Nasdaq index was narrowly higher.
Business Spending Remains a Concern
But business spending apparently remained an area of worry for Greenspan.
"Investment expenditures in the communications sector, where the amount of overcapacity was substantial, as yet show few signs of turning up, and business investment in some other sectors, such as aircraft, hit by the drop in air travel, will presumably remain weak this year," he said.
Most economists had not expected Greenspan to revise his prepared address.
Typically, he delivers identical versions of his semiannual monetary testimony to both the House and Senate committees, then fields questions. But there have been exceptions to that. One year ago, when there was a time lag of 15 days between the Senate and House testimonies, Greenspan modified a few paragraphs of his presentation the second time around, updating it to reflect the latest economic data.
"It's very unusual for Greenspan to change his words. these are very strong words," said Christopher Low, Chief Economist at FTN Financial in New York.
While his general tone was more upbeat, the central bank chief did not alter the Fed's forecasts for real gross domestic product growth of 2.5 percent to 3 percent this year, with the jobless rate rising to 6 percent to 6.5 percent.
Among the recent data, one of the most impressive reports was issued by the private Institute for Supply Management. The Purchasing Managers Index put out by ISM rose to 54.7 in February from 49.9 in January. The rise in the index above the key level of 50 indicated the factory sector had finally emerged from an 18-month slump.
The day after Greenspan's House appearance, the Commerce Department revised up its GDP number substantially -- saying the economy grew at a 1.4 percent annual rate in the fourth quarter, up from an initial estimate of just 0.2 percent.
The run of better numbers continued Thursday with the Labor Department reporting that productivity, or worker output of goods and services per hour outside the farm sector, rose at a 5.2 percent annual rate in the fourth quarter, revised upward from an initial estimate of 3.5 percent. The increase surpassed analysts' expectations for a 4.5 percent rise.
Reuters and the Associated Press contributed to this report.
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