Greenspan upbeat on growth No threat foreseen from Japan's slump

April 18, 1992|By Robert D. Hershey Jr. | Robert D. Hershey Jr.,New York Times News Service

WASHINGTON -- Encouraged by upbeat statistics reported in the past few days, Federal Reserve Chairman Alan Greenspan said yesterday that the economy grew at an annual rate of 2 percent in the January-March quarter.

That is the most specific estimate he has made and is more optimistic than his previous statements. Such a growth rate would make the quarter the best since the comparable 1989 period, during which President Bush was inaugurated.

The Fed chief, who scarcely a week ago produced a surprise cut in interest rates widely viewed as insurance for a fragile recovery, thus joined the growing contingent of private analysts who have begun scrambling to raise estimates for gross domestic product, the broadest gauge of economic performance.

"The first quarter will come in at that rate," Mr. Greenspan told the Senate Banking Committee after Sen. Paul S. Sarbanes, D-Md., challenged a 2 percent figure that had been under discussion.

Mr. Greenspan noted that the current rebound was far less robust than is typical. The average postwar recovery has posted first-year growth of about 6 percent.

The recovery, he said, "is going at a modest pace, but it is progressing."

The Commerce Department is to make its initial estimate of first-quarter output April 28.

Mr. Greenspan specifically cited as grounds for optimism yesterday's report showing that builders broke ground for new homes and apartments at a March rate that was 6.4 percent faster than in the month before.

He also mentioned reports Thursday showing a second straight hefty decline in first-time claims for unemployment benefits for the week that ended April 4 and a big February decline in the nation's foreign trade deficit, which stands at the lowest level in almost nine years.

Even as the economy gathers momentum, Mr. Greenspan said, inflation should "continue to ease off."

The subject that Mr. Greenspan was formally asked to address, along with Securities and Exchange Commission Chairman Richard C. Breeden, was what effect the decline in stock market and real estate prices in Japan would have on the United States.

In the course of explaining the Fed's earlier denial that the tumbling Japanese stock market inspired the Fed's decision last week to cut a key short-term interest rate to 3.75 percent from 4 percent, Mr. Greenspan said the Tokyo plunge had actually delayed the rate cut.

"It inhibited us from moving slightly sooner," Mr. Greenspan said. The central bank had held off implementing an earlier decision because of what it thought would have been an inappropriate move in the midst of "churning" markets, he said.

The plunge in Japanese stock prices, which resumed yesterday with a 2.11 percent decline in the benchmark 225-stock Nikkei average, poses little risk either to the U.S. economy or securities markets, Mr. Greenspan and Mr. Breeden agreed.

"The impact on the United States from Japanese stock price changes to date are likely to be limited," Mr. Greenspan said, testifying after several days of rallying by the Dow Jones industrial average that have pushed it into record territory and on a day when U.S. securities markets were closed for Good Friday.

He and Mr. Breeden described what they said was weak correlation in movements among major markets, which are dominated by domestic forces directly affecting corporate profits.

Mr. Greenspan did, however, call the drop in Japanese stock prices of more than 30 percent since October -- there was a 40 percent tumble in 1990 -- "a significant development" and one that the Fed would monitor closely.

More declines could further slow Japan's already much-reduced rate of economic growth and thereby diminish its appetite for U.S. exports, he said.

Mr. Breeden said it was important to realize that Japanese stocks have been falling for more than two years.

"This decline has been prolonged and gradual, rather than short and precipitous," he told the committee. "This has allowed market participants the greatest ability to adjust to the elimination of the speculative bubble that clearly had been created in Japanese stocks in the 1980s."

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