Former Federal Reserve Chairman Alan Greenspan, once famed for his convoluted pronouncements on the economy, is back to being blunt.
He says the U.S. is in the midst of a mild recession. And, he contends, the economy will remain stagnant for the rest of the year.
"We are clearly receding,” with economic growth now at about zero, Greenspan said in a recent interview with Bloomberg. The economy registered an anemic annual growth rate of 0.6 percent in each of the last two quarters.
Greenspan also says that the credit-market crisis is by no means over.
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"Until there are stabilized prices of homes, and I think they have a good way to go down, you still have prospective losses” for financial companies and investors, he says.
"It’s too soon to tell” if the peak of the credit crunch is behind us, according to Greenspan.
The most recent data on home prices certainly back up his point. The Standard & Poor’s/Case-Shiller home price index for the country’s 20 largest cities plunged 12.7 percent in February from a year earlier.
That’s the biggest drop in the index since it started in 2001.
Many experts agree that the economy has entered a mild recession.
The Wall Street Journal’s latest survey of 55 economists, conducted a month ago, showed an average forecast of an annual growth rate of 0.1 percent in the current quarter.
Most of the economists actually forecast a decline in GDP for the first half of the year, but the minority who predicted positive growth pushed the average up.
Echoing Greenspan, only 21 percent of the economists see home prices bottoming out this year, with 67 percent looking for the nadir next year.
Another 12 percent say that won’t happen until 2010. The economists expect unemployment, now at 5 percent, to reach 5.6 percent by year-end.
Greenspan says there is a tug-of-war going on between most U.S. corporations and the banks. Companies cleaned up their balance sheets in a major way over the past seven years, while financial institutions have been losing money hand over fist in recent months.
Non-financial companies in the S&P 500 stock index boosted their cash holdings by 23 percent during the past five years, to $615.5 billion at the end of the first quarter.
Meanwhile, the world’s biggest banks have reported $320 billion in losses since the credit market crisis flared up last summer. The International Monetary Fund expects this figure to balloon to nearly $1 trillion worldwide before it’s all over.
"This is a very unusual situation,” Greenspan says. "Neither side is obviously winning the battle.”
He notes that, so far, "The declines in employment have not been as big as you’d expect to see.”
Non-farm payrolls fell by 20,000 in April, much less than economists’ median forecast of a 75,000 drop.
Still, stagnation is the best the economy can hope for during the rest of this year, Greenspan says.
"That’s certainly the most benevolent scenario. [And] it’s not all that far from being the most probable,” he says.
© NewsMax 2008. All rights reserved.
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