The speed and scope of recovery in the US economy will be driven by business investment, because consumer spending won't increase as much as it has following past recessions, Federal Reserve Chairman Alan Greenspan said.
Spending on housing and retail goods held up better than expected over the past year, Greenspan said in the text of a speech to the Independent Community Bankers of America.
"Although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles," he said, in remarks delivered via satellite to the bankers' meeting in Hawaii.
That means companies must boost spending in order for the recovery to gain speed, he said. The Fed chairman used much of the language of his testimony to the Senate Banking Committee last week in expressing cautious optimism about the prospects for growth.
"We have seen increasing signs that some of the forces restraining the economy over the past year are starting to diminish and that activity is beginning to firm," he said. "In recent days, encouraging signs of strengthening underlying trends in final demand have emerged, although the dimensions of the pickup remain uncertain."
Greenspan also noted the big drop in inventories over the past few quarters.
"Stocks in many industries have been drawn down to levels at which firms will soon need to taper off their rate of liquidation, if they have not already done so," he said. "With production running well below sales, the lift to income and spending from the inevitable cessation of inventory liquidation could be significant."
Inventories at US wholesalers fell 0.2 percent in January to the lowest level in two years, the Commerce Department reported Monday.
Greenspan also saw slowing numbers of layoffs and Friday's report of 66,000 new jobs created last month as positive signs for the economy. "Moreover, initial claims for unemployment insurance have decreased markedly, on balance, providing further evidence of an improvement in labor markets," he said.
Still, those improvements will provide only a short-lived boost to the economy "unless sustained increases in final demand kick in before the positive effects of the swing from inventory liquidation dissipate."
US retail sales rose 0.3 percent in February, less than expected, the Commerce Department reported today, suggesting consumers took a break after spending in the fourth quarter at the fastest pace in 3 1/2 years.
That puts the onus on business investment, and there the picture isn't as rosy, he suggested. "The recovery in spending on business fixed investment is likely to be only gradual," he said.
"In particular, its growth will doubtless be less frenetic than in 1999 and early 2000 -- a period during which outlays were boosted by the dislocations of Y2K and the extraordinarily low cost of equity capital available to many firms."
Still, while there are "ample reasons to be cautious about the economy outlook," he said, "the recuperative powers of the US economy in the recent past have been encouraging."