Monday, February 26, 2007

 

Greenspan Warns of Likely U.S. Recession

Now that he can tell the truth Greenspan is speaking in language even some non-economists can understand.

"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.

Fourth quarter GDP came in at 3.4% which is much higher than predicted and gave pause to many of us who were pointing to the second and third quarter as proof of the slowdown. It turns out that GDP was pumped by inventory growth which was actually declining which will lead to a steep revision on February 28th.

On the silver lining side of the ledger:

The faster inventories contract so they are in line with demand, the faster production will resume in the nation's factories, the theory goes. That means growth should be stronger in coming quarters.
The other source of the downward revision comes from the trade gap. And although the trade gap is larger than suspected, it's up largely because U.S. consumers demanded more imports. That signals that the economy is fundamentally sound, the argument goes.

You would have to believe that Bernanke was a wizard to pull off this remarkable reimagining of how the economy is going. It is always possible to say that weakness just means we are coming in for a soft landing but you'd be foolish to bet on it.

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