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Alan Greenspan, chairman of America’s Federal Reserve, goes to Capitol Hill this week to give Congress his latest assessment of the economic outlook and its implications for monetary policy. The latest government figures suggest he was right to be cautious about the speed of America’s turnaround
"DISAPPOINTING sales; prices rising: is America’s golden recovery already tarnished? It depends, of course, on quite how strong a rebound you expected from last year’s recession. But although new data released on April 12th were quite disappointing—retail sales growing more weakly than expected, producer prices rising faster—they do not, of themselves, justify too great a mood swing."
"In spite of what appears to be a worrying jump in producer prices in March, inflation is not, for the time being, something that need preoccupy the Fed too much. Wholesale prices rose by 1% last month, compared with February—the largest rise for more than a year. But almost all the rise reflected higher energy costs, which in turn was largely a consequence of the rise in crude oil prices which accompanied the worsening of the conflict in the Middle East and temporary alarm about the security of supply. More expensive oil, if sustained for a long period, could certainly have implications for inflation. But fears—and prices—have eased since Iran and Libya were reported to have decided not to follow a temporary Iraqi embargo on oil exports, and as the prospect of unrelated interruptions to Venezuela’s oil exports faded."
"Related or not, retail sales figures for March, published on April 12th, were weaker than expected—and February’s figures were revised downwards at the same time. Sales are still growing, but only modestly, up by 0.2% compared with the previous month in both February and March. Some of the sectors that did better than the average were those closely linked to the housing market: house prices and turnover have remained buoyant, helped by very low mortgage costs."
"The recovery, then, is still tentative. Mr Greenspan himself warned against over- optimism when he gave evidence to Congressional committees in February and again in early March. In particular, he pointed out that though valiant American shoppers had helped ensure the recession was a mild one, the fact that consumer confidence and spending had not dipped as much as anticipated meant that consumer spending was unlikely to pick up as much as can usually be expected in recovery. Since consumer demand did not drop much, the Fed chairman believes it would be unwise to hope that it could now surge and give the recovery an extra shove."
"The latest figures suggest he has a point. So does the latest survey of consumer confidence from the University of Michigan which shows the index for April slipped, only slightly but unexpectedly. It is all a timely reminder that America is not yet out of the woods: the mixed signals are characteristic of an economic turning point, but they also mean that things could still go either way. America is not yet robust enough to withstand economic shocks such as a sharp or prolonged rise in oil prices, for example. So American policymakers need to remain cautious. And economies elsewhere cannot yet rely on a strong American rebound to get them out of trouble."
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