The day began with news from the federal government that retail sales in January increased 7/10 of 1 percent, following a dismal increase of just 1/10 of a percent in December. The news surprised some analysts, who were forecasting less of an uptick in retail sales.
"Any time consumers pick up spending more than expected, it's a good thing," says American Trucking Assns. Chief Economist Bob Costello, "because it will take away from inventories and lead to more truck shipments."
Tuesday morning before the U.S. Senate Banking Committee, Federal Reserve Chairman Alan Greenspan said one of the real keys to picking up the U.S. economy is clearing out a backlog of inventories from manufacturers. He said once this is done, and fuel prices start to decline (both of which he is predicting), consumer confidence should pick up.
But during his semiannual economic report to the Senate, Greenspan cautioned things could get worse before they get better. When asked during the hearing if the U.S. economy was in a recession, he replied, "at the moment, we are not."
However, "for the period ahead, downside risks predominate,'' Greenspan said, including the question of whether consumer confidence, which has fallen sharply, bounces back.
He also signaled that the central bank stood ready to cut interest rates for a third time this year if needed. Inflationary fears, which led to rate increases last year, are not an immediate concern, he said.
While many news organizations tended to focus on Greenspan's prediction that there could be a further slowdown this year, many downplayed his hints that the light at the end of the tunnel may be only six months away, with headlines such as "Greenspan Sees 'Downside Risks.'"
Greenspan had three main reasons for optimism: One, retail sales posted an increase in January. Two, Greenspan, along with the Oil Price Information Service, are forecasting fuel prices will start to ease. And three, once manufacturers begin to clear out excess inventory that built up during a disappointing fourth quarter last year, consumer demand and sales will finally catch up.
"When businesses have to work off those inventories, they don't need as many trucking shipments, so in the immediate term that's the bigger concern," said Costello. "But in the long term, we need more interest rate decreases. Six to eight months down the road, we will be looking at a brighter picture."
Greenspan's optimism didn't extend from Washington to Wall Street. A more than 2-1/2 percent surge in the NASDAQ composite index yesterday was wiped out, because some investors felt the fed won't cut interest rates as much or as quickly as they had hoped. That hope will have to wait until next month, when the fed is scheduled to meet on March 20, in what many are hoping will result in another rate cutting announcement. Many analysts are expecting another half percentage point cut.