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Greenspan says data measurement key to better forecasting

WASHINGTON — The biggest payoffs in efforts to improve economic forecasts are likely to come from raising the quality of the data collected, Federal Reserve Chairman Alan Greenspan said Tuesday.

Greenspan said economists need to put a great deal of emphasis on ways to better analyze the output of an increasingly complex society.

He said this effort is likely to yield more benefits than trying to build ever-more-complex computer models that attempt to forecast where the economy is headed.

"I suspect greater payoffs will come from more data than from more technique," Greenspan told the National Association for Business Economics.

Greenspan made no mention of the Fed's move last week to cut interest rates for a third time in an effort to stave off a full-blown recession. He also gave no hints about future Fed rate moves.

Greenspan said that in the 1960s, economists were "increasingly mesmerized by the possibilities of econometric models as a crystal ball for the future."

However, he said, it became increasingly apparent that even the most sophisticated computer models had drawbacks in forecasting the future.

"We soon learned that the economic structure did not hold still long enough to capture its key relationships," Greenspan said.

Greenspan told the group, which represents economists working both for American businesses and government agencies, that while the Fed had found economic models useful, he believes greater benefits in forecasting lie in devoting resources to improving the data collected.

He said this effort was critical given that the U.S. economy now features a much greater share of hard-to-measure fields such as computer technology and medical services.

"Over time, and particularly during the last decade or two, an ever-increasing share of GDP (gross domestic product — the broadest measure of the U.S. economy) has reflected the value of ideas more than material substance or manual labor input," Greenspan said.

"In an age of the microprocessor, fiber optics and the laser," Greenspan said, the problem of precisely measuring output has grown much more complex.

Greenspan said the Fed and other agencies are devoting more resources to improving methods of measuring the economy.

"I am encouraged by the progress that economists and economic statisticians have been making to date in tackling the daunting task of measuring real output and prices in a rapidly changing economy," Greenspan said.

The Fed last week delivered a third half-point cut in interest rates in an effort to boost demand in such interest-rate sensitive sectors of the economy as housing and autos. The goal is to keep the severe economic slowdown from developing into an outright recession.

While Wall Street had been hoping for a bigger interest rate cut, economists are predicting that last week's move will be followed by further rate reductions in coming months.