Futures contracts suggested energy prices are likely to stabilize or rise, mitigating the effect of the earlier price drops on spending.
The "steep decline" in stock prices since March 2000 has also curbed household spending, Greenspan said.
"Although stock prices have retraced a portion of their losses, the restraining effects to the net decline in equity values presumably have not, as yet, fully played out," he said.
Businesses have little ability to pass on costs, while productivity -- though still high -- has fallen. "The result has been that profit margins are still under pressure," Greenspan said.
The Labor Department on Friday reported that prices paid to factories, farmers and other producers, fell 0.7 percent last month, the third decline in a row. That made last year the tamest year for wholesale inflation since 1986.
Most important to the economic outlook is the likelihood that unemployment, currently at a 6 1/2 year high of 5.8 percent, will continue to rise.
"Job losses can be expected to put something of a damper on consumer spending," Greenspan said.
The Fed's 11 reductions in the benchmark overnight bank lending rate last year, to 1.75 percent, have helped boost demand, as has the phase-in of tax cuts enacted last year. Offsetting that, however, has been a rise in market interest rates based on investors' perceptions the economy is recovering.
Hopes dashed
Greenspan said the Sept. 11 terrorist attacks on New York and Washington made the recession a certainty. Prior to that, there were "tentative signs" the economy had begun to stabilize, "contributing the a hope that the worst of the previous cumulative weakness in world economic activity was nearing an end," he said.
"That hope was decisively dashed by the tragic events of early September," Greenspan said.
"If ever a situation existed in which the fabric of business and consumer confidence, both here and abroad, was vulnerable to being breached, the shock of Sept. 11 was surely it," he said.
Nevertheless, the US economy has an "exceptional degree of resilience and flexibility," he said.
Long-term, the outlook for the US economy "remains bright," Greenspan said.
"If the recent more favorable developments continue and gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment increase," Greenspan said.
While the pace of investment won't be as "frenetic" as in 1999 and early 2000, "the evidence strong suggests that new technologies will present ample opportunities to earn enhanced rates of return," Greenspan said.
Technologically driven increases in productivity provided the foundation for the decade-long expansion, and will again lift living standards, he said.
And the spread of technology itself will limit the length and depth of the recession, because computers have enabled businesses to respond much faster to signs of economic weakness.
"To be sure, a great deal of real economic pain has been felt over the past year and a half," he said. "But imbalances have not been allowed to fester."
RSS