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Economy shows signs of life

Federal Reserve Chairman Alan Greenspan said Wednesday that the nation's economy, though still "troubled," is on the road to at least a modest recovery.

And that recovery, he said, should be accompanied by the best performance on inflation in a generation.

Greenspan noted encouraging signs of strength in housing and retail sales and said the Fed is tracking weekly data that indicate January's huge plunge in industrial production will not be repeated this month.

"We are beginning to see stirrings" that suggest "some modest quickening" in the economy as the year unfolds, he told a House Banking subcommittee.

All of this is being accomplished in an environment where the underlying rate of inflation is declining, he said, offering the prospect "that within the foreseeable future we will have attained the lowest rates of inflation in a generation."

Greenspan's semi-annual report to Congress came as the government released two reports that support his assessment of the economy:

The Commerce Department said housing construction shot up 5.5 percent last month, spurred by a burst of activity in the Midwest.

Construction starts for houses and apartments advanced to a seasonally adjusted annual rate of 1.12-million units, the highest since May 1990.

Economists, who are counting on a gain in housing to lead the country out of recession, were heartened by the fourth monthly increase in a row.

The Labor Department said its Consumer Price Index rose a minuscule 0.1 percent last month, reflecting the fact that energy prices fell for the first time since July. The 1.5 percent energy price drop included a 1.9 percent decrease in gasoline pump prices and a 5.5 percent decline in home heating oil costs.

Consumer prices in 1991 rose 3.1 percent, the least in five years. The January increase, if it held steady for 12 months, would result in an annual rate of inflation of just 0.9 percent.

While economists are not forecasting a performance that good, they do expect inflation to be tame for the whole year.

The various changes left the Consumer Price Index, before adjusting for seasonal variations, at 138.1, compared to 134.6 a year ago. That means that a market basket of goods costing $134.60 in January 1991 would have cost $138.10 last month.

Greenspan said the Fed is watching economic developments closely and is "prepared to act should the need arise" to lower interest rates further.

But private economists said that Greenspan was clearly signalling that the central bank believes it has done enough to spur the economy and that any further reductions will come only if the expected economic rebound doesn't materialize.

Analysts said Greenspan's stand-pat stance could change quickly if economic statistics worsen, given that this is a presidential election year and that the man who reappointed Greenspan as Fed chairman, President Bush, is being pummeled by opponents over the economy.

In his remarks to Congress, Greenspan acknowledged that his forecast six months ago that there was "compelling evidence" that a recovery was under way had proved far too optimistic.