Tags: greenspan | us | economy | recession

Greenspan: Slowing Economy Won't Spark Recession

Thursday, 18 April 2019 11:46 AM

Former Federal Reserve Chairman Alan Greenspan said he doesn't expect a recession to strike the slowing American economy anytime soon, based on an indicator his firm constructed and tracks.

“Right at the moment, that particular series shows we’re still deleveraging. It’s very difficult to envisage that sort of economy going into a recession,” he said during an interview with Wharton professor Kent Smetters, faculty director of The Penn Wharton Budget Model, at a forum focused on Greenspan’s new book, "Capitalism in America: A History."

Greenspan’s consulting firm developed an indicator that tracks a company’s capital appropriations at the time its board authorizes an investment, instead of waiting for the decision to be reflected in the expenditures report months later, Knowledge@Wharton reported.

This signal has been an “extraordinarily effective leading indicator of recessions,” said Greenspan, who was Fed chair from 1987 to 2006.

While Greenspan said a recession isn't looming, he still warned that the economy was slowing.

Greenspan also warned about the economic threat of a lingering trade war with China.

“Let’s remember what a tariff is. A tariff is a tax,” he said. “If you impose a tax on your border, who’s paying? Your citizens [are paying]” because it makes imported goods pricier, the Wharton report quoted him as saying.

“Taxes withdraw purchasing power from an economy,” Greenspan said. “To say basically that we beat China in a trade war essentially means both of us lost in terms of GDP because we put tariffs on our own imports and … the economy will go down,” he said.

Greenspan also warned about the dangers of a runaway budget deficit.

“There is no doubt that we cannot keep moving at a $1 trillion deficit without inflation ultimately emerging,” Greenspan said. “If you print a lot of money, you will get higher prices.”

Greenspan also pondered the question of just what has kept the U.S. economy the most resilient in history among large nations.

“I say it’s the [U.S.] constitution,” Greenspan said. “The constitution was constructed to maintain a set of rights, basically individual rights, and as a consequence property rights, that gave all sorts of incentives — and in a very short period of time … we bypassed Britain.” By the end of World War II, the U.S. economy “stood alone by an extraordinary gap” above all others, he said. The U.S. even helped Germany rebuild, instead of imposing penalties on a defeated foe, Greenspan said.

“I don’t want to say that China will pass us at one point. If they do … it’s pretty well in the future.”

To be sure, other respected economic voices also don't see an impending recession.

Economists at Goldman Sachs Group Inc. have lowered the likelihood of a U.S. recession over the next four quarters to slightly over 10 percent from roughly 20 percent at the end of the fourth quarter, Bloomberg reported.

An easing in financial conditions has helped reduce downside risks considerably, Goldman economists including Jan Hatzius and David Choi wrote in a note earlier this month.

Signals by the Federal Reserve that its interest-rate hiking cycle is on hold have played a role in lifting sentiment.

'The Fed’s dovish shift was likely designed to decrease downside risks, and our findings suggest that this has largely worked as planned,' they wrote.

Still, with better growth momentum and improving financial conditions, the Fed may need to reconsider their pause at some point, according to Goldman’s analysis.

"As the lingering effects of the Q4 tightening gradually fade away, the Fed may eventually be willing to revisit the need for patience, as indicated in the January minutes," they wrote.

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Former Federal Reserve Chairman Alan Greenspan said he doesn't expect a recession to strike the slowing American economy anytime soon, based on an indicator his firm constructed and tracks.
greenspan, us, economy, recession
Thursday, 18 April 2019 11:46 AM
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