US Growth Heading Up, Says Greenspan

US economic growth is set to pick up in the second half of the year despite weakness in the business sector, the Federal Reserve Board chairman, Alan Greenspan, said today.

In his first detailed statement since the end of the Iraq war, Mr Greenspan noted that consumers were feeling more confident and factories were already seeing enough orders to cause backlogs.

"I continue to believe that the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that remains uncertain," the Fed chairman told the House committee on financial services.

As usual, the markets watched and listened closely to the world's most powerful central banker as he assessed America's economic prospects. He made it clear the business sector remained an area of concern.

"Households appear to have become somewhat less apprehensive about the economic outlook in recent weeks, through reports from businesses have not exhibited a similar improvement in tone," Mr Greenspan said.

Still suffering a confidence hangover after the excesses of the internet bubble, companies have been reluctant to undertake capital spending or to hire new workers. As a result, recovery since the recession of 2001 has been patchy.

In the first quarter, the US economy expanded only at an annual rate of 1.6%, following growth of 1.4% in the fourth quarter of last year, the slowest six months since the second half of 2001. Such tepid growth has failed to make a significant impact on the jobless rate of 5.8%, a source of concern to President Bush, who will be seeking a second term next year.

"Unfortunately, the future path of the economy is likely to come into sharper focus only gradually," Mr Greenspan said. "In the interim, we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance."

One sign that firms remain cautious is the high level of claims for unemployment benefits, an indication that firms are willing to get by with leaner staffs, the Fed chairman told congressmen. Still, Mr Greenspan called a rising backlog of orders for non-defence capital goods excluding aircraft "modestly encouraging".

Economists said Mr Greenspan is working with only limited data at the moment to get a clear picture of the economic outlook.

"The struggle to sort out the prospects for the US economy in the aftermath of the Iraq war continues," said Deutsche Bank in a briefing note. "The fact is that there is as yet only partial evidence - and most of that circumstantial at best - that this economy is about to escape from the 'soft patch' in which it has languished since last summer."

Mr Greenspan issued a warning on disinflation, suggesting a further decline in prices may lead to more interest rate cuts. On March 18, Fed policy makers voted to keep interest rates at a 41-year low of 1.25%.

"Substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending," Mr Greenspan said.

The Fed holds its next meeting on interest rates on May 6, with most analysts expecting rates to remain on hold.