Greenspan Lays Odds On U.S. Recession
Wednesday, March 7, 2007
Former Federal Reserve Chairman Alan Greenspan said yesterday that there is a "one-third probability" of a U.S. recession this year and that the current economic expansion won't have the staying power of its decade-long predecessor.
"We are in the sixth year of a recovery; imbalances can emerge as a result," Greenspan said in an interview at his District office. "The historically normal business cycle is much shorter" than a decade and is likely to be this time, he said.
Greenspan's outlook contrasts with the prediction of his successor, Ben S. Bernanke, who told Congress last week that the economy might strengthen this year. Bernanke's upbeat assessment helped steady stock markets on Feb. 28 after a plunge the day before that some traders attributed partly to Greenspan's musing that a recession could not be ruled out.
"It is possible that we can have a recession at the end of this year," said Greenspan, who ran the central bank for 18 years until January 2006. Bernanke declined comment.
Little more than a year after leaving the central bank, Greenspan, 81, is returning to economic forecasting, which he did before entering the government in 1974. He isn't trying to predict a number for gross domestic product or inflation; instead, he's trying to capture trends and when they might change.
Private-sector economists and policymakers are predicting that the expansion, which began in 2001, will continue. The Fed expects the economy to grow 2.5 to 3 percent this year, and 2.75 to 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.
In appearances he makes for clients, his contracts stipulate that no reporters may be admitted and no recordings made. He said he tries to have an exchange with an audience, in which he often learns something that helps him hone skills he has worked on for 50 years.
"I was aware of the problem that if I stayed public, I could make it difficult for Ben," 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 said.
Investors may have taken notice of his comments on Feb. 26 in Hong Kong because they considered them prescient. The day after he mentioned the risk of a recession, a Commerce Department report showed sales of nonmilitary 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 declined at an annual rate of 3.2 percent last quarter, the biggest decline since the final three months of 2002, according to Commerce Department figures.
Greenspan said he did not think that so-called point forecasts, in which economists refine their projections down to decimal points, could be accurate in the near term. "We really can't forecast" the economy over the next two years, he said.
Greenspan worked for what is now the Conference Board, a New York business group, as an industrial-metals analyst from 1950 to 1953. Tracking inventories, he was able to come up with a model of final demand. He expanded that model to textiles, aluminum and oil.
He found that large-scale models that used aggregate data averaged out the nuances and changes he could pick up at an industry level. Finally, some of the assumptions of firms' pricing power didn't hold up.
"I realized I was trying to see how the world works in the context of individual entities," Greenspan said.
Under his chairmanship, the Fed staff began surveying companies directly on how their businesses were doing.
"We certainly devoted some resources to our own gathering of anecdotal information," said Michael J. Prell, former head of the Division of Research and Statistics, the Fed's central forecasting unit. "Every other week, we would contact some subset of a sizable group of firms."
Greenspan's unique discipline both frustrated and amazed Fed colleagues, especially those trained in sophisticated economic modeling.
"His great value is that he has an idiosyncratic approach," said Laurence H. Meyer, a Fed governor from 1996 to 2002 who often sparred with the chairman over the outlook. "The reason why Greenspan gets and deserves disproportionate weight is that he doesn't get caught up in all the themes that tie together in a consensus forecast. He is looking at all the different strands of data."
Once, Meyer said, he was sitting in a meeting with the Fed staff discussing the inflation implications of import prices. Out of nowhere, Greenspan asked about steel-ingot prices. Meyer said he wasn't even sure what an ingot was.
"Why would I ever even ask that?" Meyer, a founder and vice chairman of the model-based forecasting firm Macroeconomic Advisers in St. Louis, said in an interview.
Macroeconomic Advisers isn't forecasting a recession this year, and Meyer said markets "over-responded" to what Greenspan said.
"Who wouldn't agree that it is possible we could have a recession?" Meyer said. "I think we are closer to the middle of an expansion than the end of an expansion."