Originally created 01/30/98

Greenspan: Asian crisis could slow economy



WASHINGTON -- Federal Reserve Chairman Alan Greenspan delivered a strongly upbeat assessment of an "exceptionally healthy" U.S. economy Thursday. He previewed a best-case scenario in which the Asian financial crisis slows but does not threaten America's long economic expansion.

Mr. Greenspan's sunny economic views cheered Wall Street, with investors seeing the remarks as an indication the central bank will not feel the need to raise interest rates anytime soon.

"Mr. Greenspan was a good friend of the financial markets today. What he said was music to our ears," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

The Dow Jones industrial average moved above 8,000 for the first time since early January before pulling back slightly. The Dow finished 57.55 points higher to 7,973 after swinging from an early 32point loss to a gain of nearly 100 points.

eavy demand for bonds sent interest rates down. Treasury's benchmark 30-year bond declined to 5.85 percent, compared to 5.94 percent the previous day.

Analysts said Mr. Greenspan's comments made them even more certain that central bank policymakers, who meet Tuesday and Wednesday, will not feel the need to push interest rates higher for some time to come.

Taking note of current conditions, Mr. Greenspan said, "It is clear that the U.S. economy has been exceptionally healthy, with robust gains in output, employment and income. At the same time, inflation has remained low -- indeed, declining by most measures over the past year."

Mr. Greenspan said while the strong growth and tight labor markets had been threatening to increase inflationary pressures down the road, he believed the Asian financial crisis would cause U.S. growth to moderate to a more sustainable pace.

`Before spring is over, the abrupt current account adjustments that financial difficulties are forcing upon several of our Asian trading partners will be showing through here in reductions in demand for our exports and intensified competition from imports," Mr. Greenspan said.

The Economic Policy Institute, a labor-backed think tank, last week predicted that America's merchandise trade deficit, already running close to $200 billion, could swell by another $100 billion at a cost of 1.1 million U.S. jobs.

Asked about that forecast, Mr. Greenspan said every week 300,000 jobs are lost in the U.S. economy but that figure is exceeded by the number of new jobs being created. He said job growth has been so strong, pushing unemployment down to a 24-year low, that some moderation in growth had to occur to keep inflation at bay.

Mr. Greenspan conceded that his currently benign forecast of the impact of the Asian crisis was based on a view that the financial fallout by plunging currencies, falling stock markets and rising bankruptcies is beginning to moderate.

ut he cautioned that "a continuation of the Asian crisis should give us pause in assuming that our economy will remain robust indefinitely." It is for that reason that U.S. support for the $100 billion bailout packages assembled by the International Monetary Fund is so critical to contain the economic fallout, he said.

The good performance of the U.S. economy, which in March will enter its eighth year of uninterrupted growth, has provided Washington with a windfall of revenues. Thus, President Clinton next week will present Congress a plan to balance the budget in 1999, three years ahead of the schedule called for in last year's balancedbudget agreement.

In his State of the Union address Tuesday, the president proposed using any surpluses to bolster Social Security. Republicans, however, charged that the administration's real aim was to use higher revenues to pay for billions of dollars in new spending. The GOP is seeking bigger tax cuts.

Greenspan said it was critical for both sides to realize that the future surpluses were based on forecasts that could easily be wrong.

`We must not let the recent good news on the budget lull us into letting down our guard," he said. He restated a long-held view that the best thing policymakers could do with any surplus was pay off some of the $5.4 trillion national debt, thereby reducing the government's borrowing demands and lowering interest rates.

On another topic, Greenspan expressed approval with the efforts being made by the Bureau of Labor Statistics to fix the Consumer Price Index so it does not overstate inflation. He said he believed those efforts had reduce the overstatement of inflation to around 0.75 percentage point and lessened the need for Congress to step in and legislate lower cost-of-living increases in such programs as Social Security.