Greenspan says too early to assess economic effects of attacks

AP Economics WriterWASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan said Wednesday it is still too early to determine how much harm the terrorist attacks will have on the U.S. economy but declared the nation's long-run prospects remain strong.

Greenspan noted that the central bank has already eased credit appreciably, referring to the two half-point interest rate cuts the Fed has made since the Sept. 11 attacks. Those rate cuts brought to nine the total of interest rate reductions made this year by the Fed, driving key rates the Fed controls to the lowest level in nearly 40 years.

Greenspan did not specifically say what the Fed would do, but many private economists are looking for further rate cuts as soon as the Fed's Nov. 6 meeting.

While saying it is still too soon to determine how severe the impacts of the attacks will be on such key sectors as consumer spending, Greenspan said, "The foundations of our free society remain strong and I am confident we will recover and prosper as we have in the past."

Greenspan did note some hopeful preliminary signs.

"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," Greenspan said.

He noted that the no-interest financing incentives being offered by automakers had produced a sharp rebound in vehicle sales at the end of September that apparently carried over into early October.

He said air freight shipments had returned to normal but that the nation's airlines and hotels and restaurants in tourist areas were reporting travel was still off considerably from pre-attack levels.

And he said many retailers of consumer goods other than cars "have only partially retraced steep drops that occurred in mid-September."

Greenspan said all of this increased the uncertainty surrounding an economy that had appeared before Sept. 11 to finally be mounting a sustained recovery following a yearlong slowdown.

Many economists believe the terrorist attacks have pushed the country into a recession with economic output expected to show declines in both the just-completed third quarter and the current October-December quarter.

They are looking for the Fed's sizable rate cuts and increased economic stimulus from Congress in the form of higher government spending and tax cuts to launch a rebound next year.

Greenspan said it will take time to see if that scenario develops.

"Nobody has the capacity to fathom fully how the effects of the tragedy of Sept. 11 will play out in the economy," Greenspan said. "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."

Greenspan said the attacks on the World Trade Center and the Pentagon had forced a readjustment in Americans' thinking about the risks they face from terrorism.

"We in the United States have assumed ourselves to be fairly well-insulated from terrorism, or at most, subject to limited and sporadic episodes similar to those previously observed on a number of occasions in Europe," Greenspan said.

He said the Sept. 11 attacks had made the country aware "of the possibility for losses on a much greater scale" and he said this would reshape views on risks that are made by businesses and financial markets.

Greenspan said the increased spending on security would lead to a one-time drop in productivity, the amount of output per hour of work. But he predicted that once this adjustment was made, the country should return to productivity growth rates in excess of the weak increases endured for the two decades before 1995.

Since 1995, annual growth rates in productivity have doubled from the preceding two decades and this improvement had been a chief factor in boosting standards of living.

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