Greenspan Sees No Recession as Post-Crisis Deleveraging Endures

Alan Greenspan says it’s too soon to start betting on a U.S. recession, according to one of his preferred gauges of American business spending.

While market-based signals and economist projections have shown rising odds that the expansion may stumble, the former Federal Reserve chief says history shows the economy isn’t sinking into a contraction.

That’s his conclusion based on a measure of how much companies are borrowing as they make decisions on investing in coming months. The ratio shows that on an aggregate basis, companies haven’t really resumed borrowing since the financial crisis.

“The economy has been weakening, but we’re still in a period of deleveraging,” Greenspan said in a recent interview. His office reaffirmed his outlook on Wednesday. “No recession in the last half century, at least, began from a period of deleveraging.”

Capital Investment

His conclusion is based on looking at capital investment on a six-month lag as a proxy for when companies decided to make the appropriations, then dividing that by cash flow. The approach shows that the amount of cash corporate boards choose to invest in long-term assets has been a “significant leading indicator” of capital spending, he says.

Specifically Greenspan pulls the underlying data from the Fed’s quarterly Financial Accounts of the U.S., a thick statistical publication also known as the Z.1 in the central bank’s nomenclature of reports.

The capital expenditure data are found in the section on nonfinancial corporate business, specifically capital expenditures minus changes in inventories divided by gross savings. That ratio hasn’t been greater than 1 since the end of 2007. The last recession started December of that year.

“I’m cautious about the long-term outlook, and we’re currently running under a 2% real GDP annual growth rate, but we nonetheless don’t appear to be sinking into recession despite the fact that economic growth has slowed significantly,” Greenspan said.