Chairman of the US Federal Reserve Mr Alan Greenspan yesterday offered his most upbeat assessment of the US economy in over a year, saying forces restraining the economy were diminishing and noting signs of growth in the tech sector, writes Conor O'Clery, International Business Editor

Almost as significant in his testimony to the Senate Banking Committee was what Mr Greenspan did not say. For the first time in several "state-of-the-economy" submissions over the last year, he did not say that, for the period ahead, downside risks predominated.

His comments helped drive up the Dow Jones Industrial Average more than 100 points in morning trading. The comments were also taken to signal the end of aggressive rate-cutting which had seen the Fed cut rates 11 times in 2001.

In less than two weeks, Mr Greenspan has markedly changed his tone on the economic outlook. In a speech in San Francisco on January 14th, he surprised analysts who had been predicting an early recovery by asserting that 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". Yesterday, however, he said: "There have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish, and that activity is beginning to firm."

He sounded caution in saying that, following "significant cyclical adjustment" last year, made worse by the September 11th attacks, growth this year would not be as strong as expected.

A key consideration in his analysis was behaviour of inventories. "Stocks in many industries have been drawn down to levels at which firms will soon need to taper off their rate of liquidation," he remarked. "Any slowing in the rate of inventory liquidation will induce a rise in industrial production if demand for those products is stable or is falling only moderately. That rise in production will, other things being equal, increase household income and spending."

The change in Mr Greenspan's emphasis was taken on Wall Street to mean he was concerned that the negative interpretation of his San Francisco speech had unduly rattled the markets and that the continuing stream of economic data was surprisingly positive.

This week, the index of leading economic indicators recorded its largest rise since February 1996. Additionally, the number of workers applying for state unemployment benefits fell last week, the Labor Department announced, showing a stronger jobs market than predicted.

Mr Greenspan noted that over the past month "initial claims for unemployment insurance have decreased markedly, on balance, suggesting some abatement in the rate of job loss". This was central to the outlook for consumer spending. Fragmentary data suggested productivity "had held up quite well of late", Mr Greenspan said. "If the recent, more favourable economic developments continue and gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment embodying these technologies will increase," he said.

"But that impetus to activity will be short-lived unless sustained growth of final demand kicks in before the positive effects of the swing from inventory liquidation to accumulation dissipate."