Monday, February 26, 2007

Depends what you mean by 'recession' 

Not to split hairs, but I'm a little puzzled by this comment from Alan Greenspan.
Former U.S. Federal Reserve Chairman Alan Greenspan warned Monday that the American economy might slip into recession by year's end.

He said the U.S. economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end.

"When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign," Greenspan said via satellite link to a business conference in Hong Kong. "For example in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle."

"While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown," he said.

The AP slugs this article "Greenspan warns of recession" but then he says it is only "possible ... in the latter months of 2007" and that indeed forecasters "are projecting forward into 2008 ... with some slowdown." So is there a recession coming?

I don't think so. As I said at the Economic Outlook last Thursday, the area economy is slowing down, and I think that word also applies to the national economy. The NABE survey released today shows that the five most pessimistic forecasters in the survey of 47 professionals had a projected real GDP growth of 1.8% for 2007 and 2.4% for 2008. Nobody has GDP growth under 1%. Now those rates would be enough to hold down employment growth to less than 100k/month and increase the unemployment rate to 5% from an average of 4.6% in 2006 (the forecasters guessed productivity growth to be 2%). But is that really a recession?

Greenspan noted that the budget deficit was still a concern, even though the size of the deficit fell below $250 billion last year. The NABE forecasters were more optimistic that the budget deficit would remain in the $200-225 range for the next two years, and that the trade deficit would improve significantly. Greenspan also points to the slowing of corporate profits, but this has been expected for at least a year by the NABE forecasters, who have not associated it with recession.

Gary Gross, who forwarded the Greenspan piece to me (thanks!) wondered if this contradicted the testimony Fed chair Ben Bernanke gave last week. I don't think so.

The central tendency of the FOMC participants' forecasts for the increase in real GDP is 2-1/2 percent to 3 percent over the four quarters of 2007 and 2-3/4 percent to 3 percent over the four quarters of 2008. The central tendency of their forecasts for the civilian unemployment rate is 4-1/2 percent to 4-3/4 percent in the fourth quarter both of this year and of 2008.

...The economy is projected to expand at a moderate rate. Although the cooling of the housing market continues to damp economic activity, the drag on economic growth from declining construction activity is expected to diminish later this year. Household spending for goods and services should rise at a solid pace, in part as a result of ongoing gains in real wages and employment and of generally strong household balance sheets. Business outlays for new equipment and software are expected to increase at a rate consistent with a moderate expansion in business output and to be supported by continuing declines in the user cost of high-technology capital equipment and by favorable financial conditions. In addition, the solid expansion of economic activity abroad should maintain the rising demand for U.S. exports of goods and services.
In his forecast Bernanke pointed to housing market as the main downside risk to the GDP projection.