Oil costs slowing U.S. economy a bit, Greenspan, Bush adviser say

Jeannine Aversa

Tuesday, July 19, 2005 | 9:40 a.m.

WASHINGTON -- High oil prices could crimp -- but not derail -- economic growth this year, Federal Reserve Chairman Alan Greenspan suggests.

Greenspan, in a letter to lawmakers released Monday, said the rise in oil prices since the end of 2003 probably shaved economic growth by around three-fourths of a percentage point this year after having reduced growth by about one-half point last year.

The economy grew by 4.4 percent last year, the strongest performance since 1999. Private economists believe this year could clock in around 3.5 percent, a slower but still healthy pace.

Referring to the drag from the higher oil prices, Greenspan said, "Aside from these 'headwinds,' the U.S. economy seems to be coping pretty well with the run-up in crude oil prices."

Greenspan's thoughts on oil were contained in a letter to Congress' Joint Economic Committee. The letter provided Greenspan's written responses to questions that were submitted to him after his June 9 appearance before the panel.

On Wall Street, bonds dropped sharply on news of Greenspan's letter, with the yield on the 10-year Treasury note rising to 4.22 percent from 4.17 percent late Friday. The Dow Jones industrials, meanwhile, fell 65.84 to 10,574.99.

Separately, Ben Bernanke, the new chairman of the White House Council of Economic Advisers, told reporters Monday that high oil prices were having an impact on family budgets but he believed the effect on the overall economy was modest.

"High oil prices certainly have been a problem for Americans," said Bernanke. "They are a burden on family budgets. They raise costs of production and reduce profits for firms."

Greenspan, in his letter, made a similar point. He said higher inflation spurred by rising energy prices has reduced households' purchasing power and slowed spending. Businesses, he said, "seem to have reassessed the profitability of some investment projects in the light of significantly higher energy costs."

Oil prices, which surged to a new closing high of $61.28 a barrel in early July, are hovering above $57 a barrel. Gasoline prices last week set a record of $2.33 a gallon nationwide.

"The higher oil prices so far have not depressed economic growth very substantially," Bernanke said. "I think that is a testament to the flexibility and adaptability of the U.S economy that it continues to grow despite this drag from energy prices."

Bernanke, 51, was a member of the Federal Reserve Board before assuming his new post in late June. He is frequently mentioned as a possible successor to Greenspan, who is expected to step down early next year.

Although Bernanke said he is impressed by the economy's ability to withstand high oil prices, he said that gyrations in those prices -- in either direction -- could create uncertainty and pose a possible challenge to the economy's good performance.

Under pressure from soaring gasoline and other energy prices, President Bush has been prodding Congress to send him an energy bill before lawmakers leave for their summer recess in August. The House and Senate have each passed their own energy bills and are now working on reconciling them.

On other issues in remarks to reporters, Bernanke refused to comment on a Chinese company's attempt to take over U.S. oil company Unocal. CNOOC's bid has raised hackles on Capitol Hill, where Democratic and Republican lawmakers are already worried about China's trade and economic relations with the United States.

Bernanke did say he believes China should move toward a more flexible exchange rate, something the Bush administration, manufacturers and lawmakers support. "I'm hopeful that they will move in that direction soon," he said.

He declined to offer an exact time frame when that would happen. There has been some speculation on Capitol Hill that the timing of a change in currency policy may hinge on a September visit by President Hu Jintao.

U.S. manufacturers contend that Beijing's practice of linking its currency to the dollar has undervalued the yuan by as much as 40 percent, making Chinese goods cheaper in America and U.S. products more expensive there. That practice, critics say, has hurt U.S. sales abroad and has contributed to the loss of U.S. factory jobs.

On Social Security, Bernanke said the president wants to see legislation address the solvency of the Depression-era retirement program as well as the creation of personal investment accounts.

"We want to see both of those elements in a final program," he said.

Associated Press writer

Martin Crutsinger contributed to this report.