Economy in 'Soft Patch,' Greenspan Tells Panel

But Fed Chairman Says Expansion Not Threatened

Federal Reserve Chairman Alan Greenspan said yesterday that the U.S. economy is "going through a soft patch," but that it won't hold back a "broadening" economic expansion that has gained momentum this year.

High energy prices in recent months have both boosted inflation and sapped consumers' spending power, Greenspan told members of the Senate Banking Committee at a semiannual hearing on Fed policies.

But the recent flare-up in inflation should prove temporary, Greenspan said, adding that the Fed still expects to raise short-term interest rates only gradually in coming months.

"Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived," Greenspan said.

Despite such problems, he said, "economic developments in the United States have generally been quite favorable" this year. "Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment," he said.

Greenspan rejected suggestions that the economy has shown signs of "significant weakness developing." Retail sales, industrial production, housing starts and the pace of job gains all fell in June, causing some analysts to wonder whether the economy was falling back into an uneven, halting recovery after months of relatively strong growth.

Many analysts estimate that economic growth slowed in the past three months to an annual rate below the 3.9 percent pace of the first quarter.

"While there has been weakness in June. . . . I might say that July seems to be somewhat better, even though we are going through a soft patch," Greenspan said in response to a question from Sen. Elizabeth Dole (R-N.C.). "There is no real underlying evidence of any cumulative weakness here."

However, Greenspan conceded that the economy does not feel like it is "charging ahead," a fact he attributed to lingering business cautiousness after the Sept. 11, 2001, terrorist attacks and the corporate scandals of the following year.

He noted, for example, that businesses continue to hire relatively more temporary employees.