Greenspan says why growth is at risk

An acceleration of the US economy from its current "soft patch" depends on an easing of international tensions and increased investment by businesses, Federal Reserve Chairman Alan Greenspan said.

"Any significant fall in the current geopolitical and other risks should noticeably improve capital outlays, the indispensable spur to a path of increased economic growth," Greenspan told the Economic Club of New York.

Those risks include a potential war with Iraq and the threat of terrorist attacks.

The Fed's 12 reductions in interest rates since the start of last year have lowered borrowing costs, boosting consumer spending. Companies have been getting their balance sheets in order, home refinancing is strong and productivity has picked up, Greenspan said.

"The limited evidence since the November easing has supported our view that the US economy has been working its way through a soft patch," said Greenspan. "And the patch certainly has been soft."

Hiring remains "subdued," and manufacturing "remains especially damped," he said. Commercial construction is weak, state and local government budgets have deteriorated and "oil prices have recently risen," he said.

Greenspan's speech to the group in past years has contained new information on the chairman's thinking about the economy and policy. Along with the current state of the economy, Greenspan discussed the risks of deflation and indicated that asset price bubbles are a risk in an economy with low inflation and high productivity rates. How central banks should deal with those bubbles is not clear, he said.

"We don't expect the Federal Reserve to raise fed funds rates next year," said Ben Yuen, who helps manage US$2.5 billion in global fixed-income assets at First State Investment, in Hong Kong. "The US economy will need a prolonged time for a recovery," said Yuen.

Treasury securities fell after Greenspan said he's optimistic that consumers will continue to support the US recovery.

"Geopolitical risk has risen markedly, further weighing on demand," Greenspan said. "Capital investment will be most dependent on the outlook for profits and the resolution of the uncertainties surrounding the business outlook and the geopolitical situation." The Fed chairman said that consumer spending, which accounts for two-thirds of growth, continues to support the recovery.