Greenspan rocks the economic boat again

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March 07, 2007/Bloomberg/Published on the web by Business Report

 

 

Washington - Former US Federal Reserve chairman Alan Greenspan said on Monday that there was a \"one-third probability\" of a US recession this year and that the current expansion would not have the staying power of its decade-long predecessor.


But financial markets took the comments in stride yesterday.

\"``We are in the sixth year of a recovery. Imbalances can emerge as a result,\" Greenspan said in an interview at his office in downtown Washington. ``Ten-year recoveries have been part of a much broader global phenomenon.

\"The historically normal business cycle is much shorter\" and was likely to be so this time, he added.

Greenspan\'s outlook contrasts with the prediction of his successor, Ben Bernanke, who told congress last week that the economy might strengthen this year.

Bernanke\'s upbeat assessment helped steady stock markets on February 28 after a plunge the day before that some traders attribute partly to Greenspan\'s musing that a recession could not be ruled out.


Investors said financial markets were downplaying Greenspan\'s recession risk message yesterday.

The Dow Jones industrial index gained 0.78 percent at 12 144.54 points at 7pm in South Africa, while the Nasdaq index rose 1.27 percent to 2370.3 points.

\"``It\'s not the message we\'re getting from the Fed,\" said Bernd Wuebben, a senior bond market strategist at BNP Paribas New York.

\"All Fed speakers have tried to assuage the market.\"

Greenspan, who ran the central bank for 18 years until last year, said: \"``It is possible that we can have a recession at the end of this year.\" Bernanke declined to comment.

But little more than a year after leaving the central bank, Greenspan is returning to economic forecasting - a role he enjoyed before entering government service in 1974. He is not trying to predict a number for gross domestic product or inflation: he is trying to capture the trend and when it might be about to change.


Private sector economists and policy makers are calling for the expansion, which began in 2001, to continue. The Federal Reserve expects the economy to grow between 2.5 percent and 3 percent this year, and between 2.75 percent and 3 percent next year, according to forecasts presented to congress last month.

Greenspan said he had been careful to avoid making life difficult for his successor.

His contracts with clients stipulate that there will be no reporters present and no recordings.

\"``I was aware of the problem that if I stayed public, I could make it difficult for Ben [Bernanke],\" he said. \"``For the most part it has worked. I was beginning to feel quite comfortable that I was fully back to the anonymity I was seeking.


\"``I was surprised at this recent episode,\" he added.

Investors may have taken notice of his comments on February 26 because they considered them prescient. The day after he mentioned the risk of a recession to a Hong Kong audience on February 26, a commerce department report showed sales of non-military capital goods, excluding aircraft, dropped 2.7 percent in January, the biggest decline since September 2001. Orders slumped by the most in three years.


Broader capital spending is also weakening. Corporate purchases of equipment and software slid at an annual rate of 3.2 percent last quarter, the biggest fall since the final three months of 2002, according to separate commerce department figures.


Greenspan did not believe that so-called point forecasts, where economists hone their outlook down to decimal points, could be accurately made in the near term. \"We really can\'t forecast\" the economy over the next two years, he said.

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