Recession still likely in US, says Greenspan

Recession still likely in US, says Greenspan 

 

Ex-Fed chief also thinks it is too soon to tell if worst of credit crisis is over

 

THE United States is still more likely than not to have a recession in spite of the relative stabilisation in the economy in recent weeks, Mr Alan Greenspan has told the Financial Times (FT).

The former chairman of the Federal Reserve said: ‘I still believe there is a greater than 50 per cent probability of a recession.’

 

But he added, ‘that probability has receded a little, and I think the probability of a severe recession has come down markedly’.

 

His comments, in an interview with the FT, come as a counter to the increasing optimism in some quarters.

 

In the past six weeks, most economists have scaled back their estimates of the likelihood of a US recession following a better-than-expected jobs report and stronger business activity surveys.

 

Many now think the US will narrowly dodge an outright economic contraction.

 

The former Fed chief also said it was ‘too soon to tell’ whether the worst of the financial crisis was over, as this would depend on what happened to house prices.

 

Mr Greenspan estimated that house prices would fall by another 10 per cent from their February levels, for a

 

total peak-to-trough decline of roughly 25 per cent, said the FT.

 

If the economy is weak and the market overshoots, house prices could decline by another 5 per cent, he said.

 

‘Such house price declines imply a major contraction in the level of equity in owner-

 

occupied homes, the ultimate collateral for mortgage-backed securities.’

 

Mr Greenspan said it was still not clear whether big financial institutions had taken all the write-downs they would need to take on higher rated tranches of mortgage-backed credit products.

 

He admitted that he was puzzled by recent economic data that suggested the economy had stopped deteriorating around March.

 

‘A recession is characterised by significant discontinuities in the data,’ he said. ‘It started off that way – there was a period of sharp discontinuity from December to March. But then, it stopped.’

 

Mr Greenspan believes there is a ‘tug of war’ taking place in the economy, with financial sector stress pulling one way and strong corporate liquidity pulling the other. Corporate liquidity is being eroded, but only gradually.

 

‘No one knows how this tug of war will end – specifically, whether the financial crisis will end before it drags down the real economy.’

 

The main risk he sees is that the household savings rate will move up more rapidly than most analysts expect as home equity falls, the labour market weakens and access to credit declines.

 

A rise in the savings rate, excluding the one-off impact of tax rebates, would depress growth in consumer spending, possibly to the point where there is an outright decline in consumption, said the FT.

 

This has not happened for many years. For instance, consumer spending grew every quarter during the 2001 recession.

 

Source: Straits Times

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