AUGUST 2004

Greenspan on the Economy

As we try to separate the economic wheat from the chaff over the next six weeks of political posturing in Campaign 2004, here is a sampling of what Federal Reserve Chairman Alan Greenspan had to say in his Senate Banking Committee testimony on July 20, 2004.

• "Expanding employment should provide a lift to personal disposable income, adding to the support stemming from cuts in personal income taxes over the past year. In addition, the low interest rates of recent years have allowed many households to lower the burdens of their financial obligations. Although mortgage rates are up from their recent lows, they remain quite attractive from a longer-run perspective and are providing solid support to home sales."

• "Between mid-2002 and mid-2003 homeowners were able to refinance at lower interest rates almost half of total outstanding home mortgage debt and thereby to substantially reduce monthly debt service payments."

• "There have been much clearer indications over recent months that conditions in the labor market are improving. Most notably, gains in private nonfarm payroll employment have averaged about 200,000 per month over the past six months, up sharply from the pace of roughly 60,000 per month registered over the fourth quarter of 2003."

• "All of the other qualitative indicators we have currently in the third quarter suggest that employment is continuing to expand. And, indeed, while there has been weakness in June, and a number of your colleagues mentioned this, I might say that July seems to be somewhat better, even though we are going through a soft patch."

• "The evident strengthening in demand that underlies this improved performance doubtless has been a factor contributing to the rise in inflation this year. But, inflation also seems to have been boosted by transitory factors such as the surge in energy prices. Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived."