Key US indicator suggests Greenspan is too pessimistic

A key forecasting gauge for the US economy made its largest gain in almost six years in December, suggesting that the economy could emerge from recession within the next three months.

The 1.2 per cent rise in the index of leading economic indicators underlines a suspicion widespread on Wall Street that Federal Reserve chairman Mr Alan Greenspan failed to read the signs of recovery properly in a recent speech in San Francisco. In that speech Mr Greenspan said it was still "premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold".

After Wall Street took this as a negative assessment, Fed governors rushed to say it was not meant to dampen expectations of early recovery. Mr Greenspan is expected to change his tone in testimony to the Senate Budget Committee in Washington tomorrow.

"Greenspan is widely expected to revise his forecast to highlight a more positive economic environment than was perceived in his recent San Francisco speech," said Mr Brian Wesbury, chief economist with Griffin, Kubik, Stephens & Thompson of Chicago.

This means there is now less prospect of another rate cut. The Fed cut short-term rates 11 times in 2001 as the US economy slipped into recession.

The Conference Board, which issues the index of leading economic indicators, said the December rise was the largest since February 1996. "The fact that the increase was so strong in December, the fact that the index was up strongly in November, the longevity of the increase and the breadth throughout different sectors of the economy all go along with expectations that in one, two or three months the recession will be over," the board's chief economist, Mr Ken Goldstein, said.

Mr Goldstein said the rapidity with which consumer expectations bounced backed was a surprising components of the report.