An atmosphere of deep uncertainty after the attacks on the United States on September 11th had depressed the US economy in the short term and made it difficult to maintain productivity, US Federal Reserve chairman Mr Alan Greenspan said yesterday in testimony to Congress.
In his first public analysis of the effects of the attacks, Mr Greenspan admitted forecasting the immediate future was impossible in the "more hostile world" which had been created, where risk and prices were being reassessed and the record productivity levels of recent years could not be guaranteed.
Mr Greenspan's remarks, and the news that 29 staff members in Senate majority leader Senator Tom Daschle's office had tested positive for anthrax, sent the markets on a downward spiral after an early burst of enthusiasm over positive reports from technology giants Intel and IBM. The Dow and Nasdaq remained volatile throughout the day.
The Fed chairman's testimony to the Joint Economic Committee of Congress took place in an atmosphere of crisis on Capitol Hill, with some members excusing themselves to attend an emergency briefing on the anthrax attack.
The pronounced rise in uncertainty had dampened consumer spending and capital investment, Mr Greenspan said. "Households and businesses, confronted with heightened uncertainty, have pulled back from the marketplace, though that withdrawal has been partial and presumably temporary.
"Nobody has the capacity to fathom fully how the effects of the tragedy of September 11th will play out in our economy. But, in the weeks ahead, as the initial shock continues to wear off, we should be able to better gauge how the ongoing dynamics of these events are shaping the immediate economic outlook. For the longer term, prospects for ongoing rapid technological advance and associated faster productivity growth are scarcely diminished."
He warned that insurance prices would increase to such a degree that "the viability of free markets may require the cost of insurance to be basically reinsured by taxpayers as in Great Britain and Israel".
In response to questions, Mr Greenspan said US financial markets had built in some expectation of further attacks, which could provide a cushion should the nation face more shocks.
Mr Greenspan admitted that "the outlook is clearly biased toward economic weakness as we have stated on numerable times" and painted a picture of an economy struggling to avoid recession in the period before the attacks.
"In the days following the attack, the level of activity declined significantly. The shock was most evident in consumer markets, as many potential purchasers stayed riveted to their televisions and away from shopping malls. "As the initial shock began to wear off, economic activity recovered somewhat from the depressed levels that immediately followed the attacks, though the recovery has been uneven.
Markedly increased incentives induced a sharp rebound in motor vehicle sales by the end of the month that has carried apparently undiminished into the first half of October." However, many retailers of other consumer goods report that sales have only partially retraced the steep drops that occurred in mid-September. Overall airline passenger traffic, while above its mid-September lows, was still off considerably in early October from pre-attack levels.
"Markets across our economy will adjust to the altered perceptions of risk that we now confront. Critical to that adjustment process is the behaviour of consumers and business people. Behaviour is difficult to predict in circumstances such as those we have experienced in the past five weeks. But judging from history, human beings have demonstrated a remarkable capacity to adapt to extraordinarily adverse circumstances. And I expect the same adaptability to become evident in the present situation."
