The U.S. economy appears to be on the mend, but the forces that led to the slowdown might not be ready to quit the fight just yet.

That message, delivered Friday by

Federal Reserve Chairman Alan Greenspan, quieted Wall Street's enthusiasm for stocks on the last trading day of the week.

"There are sound reasons for concluding that the long-run picture remains bright, and even recent signals about the current course of the economy have turned from unremittingly negative through the late fall of last year to a far more mixed set of signals recently," Greenspan said in a speech at the Bay Area Council Conference in San Francisco.

"But I would emphasize that we continue to face significant risks in the near term," he continued. "Profits and investment remain weak and, as I noted, household spending is subject to restraint from the backup in interest rates, possible increases in unemployment, and from the effects of widespread equity asset price deflation over the past two years."

Stocks were hovering around the flatline for most of the trading day before the Fed chairman's remarks were publicized. Within minutes of his comments on the lingering risks to the economy, the major averages turned decidedly lower.

In afternoon trading, the

Dow was down 64 points to 10,004, while the

Nasdaq was off 20 to 2028. The

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S&P 500 was also losing ground.

Though investors seemed to be focusing on the negative aspects of the speech, Greenspan did offer several hopeful observations. "

Arguably, our economy has not been weakening cumulatively in recent weeks," he said. "In fact, indications of stabilization, similar in many respects to those observed in the period immediately preceding Sept. 11, have been appearing with greater frequency."

Greenspan, not surprisingly, didn't offer any specifics about the direction of interest rates, but he did touch on several areas of the overall economy during his prepared remarks, including business inventories, mortgage refinancing, job losses and capital spending.

As for inventories, the Fed chairman said many industries have drawn down their stores to levels at which firms will soon need to taper off their rate of liquidation, if they haven't already. "Indeed, in recent months, there have been fewer reports from industrial purchasing managers that their customers' inventories are too high," he said. "Moreover, the relative stability of industrial commodity prices in recent weeks, and especially the recent firmness in the prices of semiconductors, could be hinting at less intense stock drawdowns."

A slowing in the rate of inventory liquidation will lead to a rise in industrial production if demand for those products is stable or is falling only moderately, Greenspan pointed out. "That rise in production will, other things being equal, increase household income and spending," he said.

However, he added that the "impetus to activity will be short-lived unless the demand for goods and services itself starts to rise. On that score, despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold."

For the household sector, Greenspan said the outlook for demand is mixed. The recent rise in home mortgage rates, however, is likely to damp housing activity and equity extraction. How well the labor market holds up will also weigh heavily on consumer spending, he said. "

The unemployment rate may well continue to rise for a time, and job losses can be expected to put something of a damper on consumer spending," the chairman said.

Near the end of his speech, Greenspan said "if the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a relatively mild downturn. To be sure, a great deal of real economic pain has been felt over the past year and a half. But imbalances have not been allowed to fester."