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Greenspan's Words Awaited

Federal Reserve chairman Alan Greenspan was expected to give his view on the strength of the economic recovery in testimony before a Congressional committee on Wednesday.

While the markets were awaiting Greenspan's remarks for signs of where interest rates will go, the place of the economy in the presidential campaign means a wider audience will be watching to see what trends the Fed chair detects in recent economic data.

That data has pointed to continued — but slowing — growth in jobs and the overall economy.

A Labor Department report released Friday said the economy added 144,000 jobs in August — the biggest jobs gain since May and marked the 12th month in a row that payrolls grew. However, that fell short of the 150,000 new jobs economists were expecting.

The unemployment rate dipped to 5.4 percent last month from 5.5 percent in July, but that was because people left the work force for any number of reasons.

Job gains for July were revised up to 73,000, still a lackluster number but an improvement from the 32,000 advance first estimated. Payrolls for June also were revised up to show a larger gain than first reported.

But the economy has lost 913,000 jobs since President Bush took office. And economists want to see at least 200,000 net jobs added a month on a consistent basis before declaring the labor market fully healed. The economy has to continue to add jobs to absorb new entrants to the labor market.

The jobs picture has become fodder on the campaign trail. On Tuesday, Democratic presidential nominee Sen. John Kerry said, "Because of George Bush's wrong choices, this country is continuing to ship good jobs overseas — jobs with good wages and good benefits."

Meanwhile, President Bush slammed Kerry for not promising to crack down on allegedly frivolous lawsuits.

Mr. Bush said that "ending junk lawsuits" is necessary to create more jobs and that "the cost to our economy of litigation is conservatively estimated to be over $230 billion a year." Kerry running mate John Edwards is a personal injury lawyer.

The U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the last recession.

Greenspan had said that the economy hit a "soft patch" in June. However, he and his Fed colleagues expressed confidence last month that economic activity would pick up.

In August, however, retail and automobile sales came in sluggish, consumer confidence dropped and manufacturing activity grew at a slower pace.

The Fed, in a bid to keep inflation from becoming a problem, boosted short-term interest rates twice this year. That has left a key rate controlled by the Fed at 1.50 percent, still low by historical standards. The Fed's next meeting is Sept. 21. Economists believe the Fed will push rates by another one-quarter percentage point at that time.

"I think Greenspan will stick to his mantra of a measured pace of interest rate hikes," said John Lynch, chief market analyst at Evergreen Investments. "We're transitioning from the spectacular growth of the past year to more boring, but still important, growth, and the interest rate policy has to reflect that."

Observers will also be keen to hear what Greenspan has to say about the government's fiscal health.

Long a deficit hawk, Greenspan surprised some observers by backing Mr. Bush's tax cuts despite their expanding the deficit. Recently, the Fed chair has called for tighter government finances, but called for reductions in spending rather than tax hikes.

The Congressional Budget Office is projecting that this election-year's federal deficit will reach $422 billion, the highest ever, yet a smaller shortfall than analysts predicted earlier this year.

Bush administration officials hailed the lower estimate as a sign of resurgent growth. But according to The New York Times, the CBO also cast doubt on the president's plan to halve the deficit in five years.

Greenspan has also made substantial comments in recent months about federal programs like Social Security and Medicare, in which he warned of long-term insolvency.

Last month he said that the country will face "abrupt and painful" choices if Congress does not move quickly to trim the Social Security and Medicare benefits that have been promised to the baby boom generation.