Seeing as how the market already has a pretty good idea of which direction the Federal Reserve is heading, there's the temptation to regard tomorrow's Testimony Formerly Known as Humphrey-Hawkins as a bit of an afterthought.

However, because this usually represents Fed Chairman

Alan Greenspan's most extensive annual address to lawmakers, it can't be dismissed. No, Greenspan isn't going to tell anyone what the Fed is planning for the next few months (although most economists are betting on more interest-rate decreases), but he's likely to regale the

Senate Banking Committee

with his assessment of current economic conditions and the Fed's forecasts for growth for the coming year.

Greenspan is also likely to focus extensively on a few facets of the economy of greatest concern to him -- financial conditions, inventory concerns and the effect that has on production and employment, and recent productivity figures, which were stronger than expected. Most likely, Greenspan's also going to be swamped with questions about the government's plans for tax cuts.

Still Worried

At Greenspan's last Humphrey-Hawkins appearance in

July, the Fed was projecting a 2001 growth rate of

gross domestic product

somewhere between 3.25% and 3.75%, a mild slowing (the Fed always seems to lowball on predictions), and predicting the unemployment rate to remain around 4%.

Mickey Levy, chief economist at

Bank of America

, figures they'll drop their estimates for 2001 GDP to around 2.5% and bump up unemployment expectations to around 4.5%.

"He'll leave the clear impression that the risks of a downturn far outweigh the risks of inflation," Levy said.

And none of this is likely to alter the Fed's stance, which is geared toward hitting the market with a couple more rate cuts in the fed funds rate, currently perched at 5.5%. The

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fed funds futures contract is currently anticipating another 50 basis-point cut at the next Fed meeting March 20. While certain signs -- such as improvements in liquidity in the bond markets -- have generated a rebound in corporate bond issuance, it hasn't yet translated to a rebound in demand, especially with regard to business investment.

Greenspan likes to look at corporate bond issuance and credit spreads, as well as other financial conditions, such as money supply and loan growth as measures of lenders' confidence. Corporate bond issuance rebounded in January, thanks to an improvement in credit spreads. When compared with Treasuries, they're still wide historically, meaning it costs more than it has in the past for companies to borrow money.

However, it's not as difficult as it was in the fourth quarter, and the ability of companies to attract financing means they'll have more money to spend on improvements, expansions and technology investment.

Wanted: More Demand, Please

The stock market's rally in January, fostered by the rate cuts, was an acknowledgement of improving financial conditions. But for that to morph into a sustained improvement in the economy (and the market), a subsequent rebound in consumer and business demand will have to happen.

Currently, it hasn't -- one reason why the Fed's stance toward easing isn't expected to change. Inventories are just one part of this issue; Greenspan acknowledged as much in his most recent testimony before the Senate Budget Committee, in which he discussed how the sharp decline in spending resulted in companies retaining much higher inventories than they'd wanted. With demand shrinking and inventories overhanging, companies have cut production rapidly. Early evidence shows that inventories are declining now, which would in a few months leave companies free to increase production if necessary -- but that's

if

demand rebounds.

"If he does address

inventories, he'll say that businesses have aggressively cut back," Levy said. "But that leaves open the question, 'When does demand rebound?' The answer there is, the Fed's going to have to ease more."

At least this past week, the Fed must have been heartened by the most recent productivity and unit labor costs report for what it suggests about the economy. Productivity dipped only to a 2.4% rate in the fourth quarter (from 6.3% just two quarters earlier), despite the sharp drop in GDP.

Generally, a sharp drop in demand produces an even greater decline in productivity, as workers are being employed to produce fewer goods. The decline to 2.4%, a level that in the mid-1980s would have been considered stellar, suggests (as Greenspan said himself) that structural changes in the economy due to technology have helped employers maintain higher levels of productivity than in the past.

Why is this important? Because higher productivity helps keep company costs down. If productivity slows, costs are rising and companies are faced with eroding profits or massive layoffs. So far, the most aggressive measure that employers have utilized has been to cut back hours worked.

"In the past, employers weren't able to adjust work hours that quickly," said Christopher Wiegand, economist at

Salomon Smith Barney

.

A steady decline in productivity would be a harbinger of that self-fulfilling prophecy the Fed wants to see avoided -- more layoffs begetting a sharper drop in consumer demand, which causes more layoffs, etc. For that not to happen, demand has to pick up. Some aspects, such as an increase in borrowing, are pointing in the right direction. Some are not.