'Downside Risks Predominate'

On the same day that the U.S. government announced the biggest monthly retail gain in four months, Federal Reserve chairman Alan Greenspan told Congress that growth has slowed substantially and “downside risks predominate” in the coming months.

Even though January 2001 retail sales were up 0.7 percent over a year earlier, Greenspan said in his semi-annual economic report that the economy is slowing as businesses work off unsold inventories and consumers appear less confident about the future – although he thinks consumer confidence “'at least for now”'is still at levels that have been historically compatible with economic growth.

At the beginning of the year, “'the slowdown in the economy that began in the middle of 2000 intensified, perhaps even to the point of growth stalling out around the turn of the year,”'he told the Senate Banking Committee. In addition to the possibility of a break in confidence,”'the Fed chief said, “'we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come.”'But he said the economy could be headed for a rebound once inventories were brought in line with sales.

Greenspan also presented new Fed economic forecasts, suggesting that the economy will grow by a modest 2 percent-to-2.75 percent this year, well below his forecasts of as much as 3.75 percent last July. In light of the slowdown, the central bank increased its estimate for unemployment slightly, to around 4.5 percent by the end of this year. Last July, the Fed had estimated unemployment would climb to around 4.2 percent by the end of 2001, a level it reached in January.

The Fed projected that inflation will moderate more because of the economic weakness, with an inflation gauge tied to the GDP rising by between 1.75 percent and 2.25 percent this year, down from an estimate of 2.5 percent the Fed had made in July.