Greenspan disputes US recession signs

The US economy may not be growing at all, but it is not yet clear that it is falling into recession, former Federal Reserve chairman Alan Greenspan has told the Financial Times.

Mr Greenspan said: "The reason we have had this extraordinary volatility in stock markets over recent days is that there is extreme uncertainty about the financial and economic outlook."

In a series of interviews with the FT, Mr Greenspan argued that the hallmark of a recession was discontinuity in the economic data. "You don't gradually fall into recession, you jump," he said.

"We are beginning to see discontinuities in the data - for instance, the employment report and the Philadelphia Fed survey," he said.

But other indicators continued to give more positive signals. "The hard data that we are in recession is by no means conclusive," he said.

He questioned the utility of using standard economic models to forecast whether the US would now go into recession or not.

"The models never forecast recession, because the parameters are dominated by what happens in normal times when the economy is growing," he said. "In fear-driven periods the parameters are quite different from the periods of euphoria."

Mr Greenspan said there had been a "stand-off" between relatively benign macroeconomic data and the forces that had been driving financial market turmoil.

Companies had been insulated from financial developments because they had strong cash flows and had taken advantage of a long period of low interest rates to lock in long-term funds.

"In addition, companies have very significant buffers," he said. "They could access a lot of potential financing merely by reducing or eliminating the current level of repurchase of shares."

However, Mr Greenspan said "the stand-off now appears to be ending".

Mr Greenspan said the uncertainty over the size of losses facing financial institutions would not disappear until it was clear at what level US house prices would stabilise.

He said prices would begin to stabilise when the rate of liquidation of unsold new homes peaked, adding: "We are not there yet."

But the former Fed chief said: "We seem to be getting some evidence of potential stabilisation in new home sales" - largely because the share of sales financed by subprime loans had already fallen to almost zero.

Also on the positive side, Mr Greenspan said: "The initial [unemployment] claims data are not signalling recession."

Carmakers reduced their inventories of unsold vehicles in the fourth quarter, he added, suggesting there would be no need to slash production in the early months of this year.

However, Mr Greenspan said there was likely to be "some erosion in business capital investment" in the months ahead. "Profit margins, I believe, have peaked and the capital investment opportunities in the US are declining," he said.

He said his assumption has long been that the consumer "should be exhibiting weakness owing to the wealth effect of falling asset prices and the high price of oil - which is clearly a suppressant on consumer markets".

The consumer "is weakening", he said, "but the question is how much? Motor vehicle sales in December, which are more reliable than retail sales, remained stable".