alan greenspan : the economic outlook testimony by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the joint economic committee, us congress, washington, 13 november 2002. * * * the past year has been both a difficult and a remarkable one for the united states economy. a year ago, we were struggling to understand the potential economic consequences of the events of september 11. at that time, it was unclear how households and businesses would react to this unprecedented shock as well as to the declines in equity markets and cutbacks in investment spending that had already been under way. economic forecasts were lowered sharply, and analysts feared that even these downward - revised projections might be undone by a significant retrenchment in aggregate demand. the united states economy, however, proved to be remarkably resilient : in the event, real gdp over the past four quarters grew 3 percent - - a very respectable pace given the blows that the economy endured. although economic growth was relatively well maintained over the past year, several forces have continued to weigh on the economy : the lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks. over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch. households have become more cautious in their purchases, while business spending has yet to show any substantial vigor. in financial markets, risk spreads on both investment - grade and non - investment - grade securities have widened. it was in this context that the federal open market committee further reduced our target federal funds rate last week. the consumer until recently has been the driving force of this expansion. faced with falling equity prices, uncertainty about future employment prospects, and the emergence of the terrorist threat, consumer spending has slowed over the course of the past year but has not slumped as some had earlier feared it might. tax cuts and extended unemployment insurance provided a timely boost to disposable income. and the deep discounts offered by many businesses on their products were most supportive. in particular, automotive manufacturers responded to the events of september 11 with cut - rate financing and generous rebates. these incentives were an enormous success in supporting - - indeed increasing - - the demand for new cars and trucks. sales surged each time the incentive packages were sweetened and, of course, fell back a bit when they expired. some decline

the recent softness in consumption suggests that this net wealth erosion has continued to weigh on household spending. that said, it is important to recognize that the extraction of equity from homes has been a significant support to consumption during a period when other asset prices were declining sharply. were it not for this phenomenon, economic activity would have been notably weaker in the wake of the decline in the value of household financial assets. in the business sector, there have been few signs of any appreciable vigor. uncertainty about the economic outlook and heightened geopolitical risks have made companies reluctant to expand their operations, hire workers, or buy new equipment. executives consistently report that in today ’ s intensely competitive global marketplace it is no longer feasible to raise prices in order to improve profitability. there are many alternatives for most products, and with technology driving down the cost of acquiring information, buyers today can ( and do ) easily shift to the low - price seller. in such a setting, firms must focus on the cost side of their operations if they are to generate greater returns for their shareholders. negotiations with their suppliers are aimed at reducing the costs of materials and services. some companies have also eschewed the traditional annual pay increment in favor of compensation packages for their rank - and - file workers that are linked to individual performance goals. and, most important, businesses have revamped their operations to achieve substantial reductions in costs. on a consolidated basis for the corporate sector as a whole, lowered costs are generally associated with increased output per hour. much of the recent reported improvements in cost control doubtless have reflected the paring of so - called " fat " in corporate operations - - fat that accumulated during the long expansion of the 1990s, when management focused attention primarily on the perceived profitability of expansion and less on the increments to profitability that derive from cost savings. managers, now refocused, are pressing hard to identify and eliminate those redundant or nonessential activities that accumulated in the boom years. with margins under pressure, businesses have also been reallocating their capital so as to use it more productively. moreover, for equipment with active secondary markets, such as computers and networking gear, productivity may also have been boosted by a reallocation to firms that could use the equipment more efficiently. for example, healthy firms reportedly have been buying equipment from failed dot - coms. businesses may also have managed to eke out increases in output per hour by employing their existing workforce more intensively