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Slowdown, No Recession --Greenspan

February 23, 1988|From Reuters

WASHINGTON — Federal Reserve Board Chairman Alan Greenspan said today that U.S. economic growth will slow this year but that he sees no indication that the country is slipping into recession.

In testimony to the House Banking Committee that accompanied the Federal Reserve Board's semiannual report to Congress, Greenspan said the economy is entering what he called a "geriatric" phase after 63 months of expansion.

But he said business "order books are solid, really strong . . . really very impressive."

The Fed's policy-making Federal Open Market Committee said in its report that U.S economic growth is likely to slow to 2% to 2.5% in 1988 after a robust 3.8% growth rate in 1987.

The report also said inflation is likely to rise to between 3.25% and 3.75% in 1988, after a 3% increase in 1987.

Market 'Edginess'

Greenspan told the panel that the Fed eased up slightly on the credit supply a few weeks ago because of indications that the U.S. economy is softening.

He said the effects on the economy of the Oct. 19 stock market crash may not be fully evident.

"I think it is fair to say that markets still are exhibiting a certain edginess, and we can't be sure yet that normal market functioning has been fully restored following the events of October," he said.

White House officials, anxious to avoid a recession in a presidential election year, had been critical of Federal Reserve policy in late 1987, saying an overly tight policy might have contributed to the October stock market crash and underestimated the risks to adequate growth.

"We did not see ourselves as being tight," Greenspan said.

Sprinkel 'Quite Happy'

He said he thinks that chief White House economic adviser Beryl W. Sprinkel is satisfied with Fed policy since money supply growth rose this month. Indeed, Sprinkel last week said he is "quite happy" with the Fed.

Greenspan said the Fed's economic growth forecast, which is in line with the Administration's prediction of 2.4% growth, assumes further progress in reducing the federal budget deficit. He said continued fiscal restraint is crucial to fostering balanced growth and redressing global trade imbalances.

The Fed report predicted that U.S. unemployment, which was 5.8% in December and January, will average 5.75% to 6% by the end of 1988.

Falling mortgage interest rates should give housing a boost in the coming months, Greenspan said.

In addition, business investment spending should be bolstered by the desire to increase international competitiveness and by already high levels of capacity use in a number of major industries, he said.

Relatively Slow Output

Although the gross national product, which is the total value of goods and services, should rise moderately for the year, output in the first part of the year could be relatively slow as manufacturers reduce inventories built up during the fourth quarter of 1987, he said.

The auto sector is already working off inventories, Greenspan said.

Greenspan said he sees non-oil import prices rising substantially, while domestic energy prices should increase only slightly. To maintain progress toward stable prices, business and labor must show restraint in price and wage behavior, he said.

He warned that policy-makers should not become complacent about inflation, although he sees no acceleration imminent.

He also said that the United States has turned the corner on reducing its massive trade deficit, which was a record $171 billion in 1987, but that progress toward narrowing the gap will be slow and erratic.

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