Greenspan Says 2.5% Growth Possible in Third Quarter

Greenspan Says 2.5% Growth Possible in Third Quarter

Aug. 2 (Bloomberg) -- The most severe recession in at least five decades may be ending and growth may resume at a rate faster than most economists foresee, former Federal Reserve Chairman Alan Greenspan said.

“We may very well have 2.5 percent in the current quarter,” Greenspan said in an interview today on ABC’s “This Week” program. “The reason is there has been such an extraordinarily high rate of inventory liquidation that the production levels are well under consumption.”

The U.S. economy contracted at a better-than-forecast 1 percent annual pace in the second quarter, the Commerce Department reported July 31. Stabilization of housing markets and consumer spending, a lessening of financial turmoil and increased government spending all suggest the longest recession since the 1930s may be close to ending.

“I’m short-term optimistic, but with many caveats,” the former Fed chairman said. Housing markets have “stabilized temporarily” though it is “possible” the economy might relapse if there is a further slide in home prices of more than about 5 percent.

‘Close to Stabilization’

“I don’t think it’s going to happen, but I do think it is possible that we could get a second wave down,” he said. “But the important issue is that if we don’t, and I think the probability is that we won’t, that we are close to stabilization.”

Economic growth will average 1 percent in the current quarter, according to a Bloomberg News survey of economists in July.

“I’m pretty sure we’ve already seen the bottom,” Greenspan said. “In fact, if you look at the weekly production figures for various different industries, it’s clear that we’ve turned, perhaps in the middle of last month, the middle of July.”

He predicted “the unemployment rate is going to continue to rise, but more slowly than it’s been. We’ll continue to have job loss, but that’s slowing as well.”

Fed Chairman Ben S. Bernanke projected a week ago the U.S. unemployment rate will top 10 percent, up from 9.5 percent in June, even as the economy recovers. Growth of about 1 percent is likely in the second half of the year, Bernanke said at a town- hall-style meeting.

Extended Jobless Benefits

U.S. Treasury Timothy Geithner, in a separate interview on ABC, agreed that the recession may be ending, while adding the U.S. unemployment rate may not peak until the second half of 2010. That could possibly prompt another extension in unemployment benefits, he said.

“I think that is something that the administration and Congress are going to look very carefully at as we get closer to the end of this year,” Geithner said.

“There are signs the recession is easing,” Geithner said. It is “not clear yet” how strong growth will be.

Greenspan said he sees “a very significant improvement in the financial system,” Greenspan said. “And it’s been the financial system where the problems have been. Collapse, I think, is now off the table.”

Banks and financial institutions have reported more than $1.5 trillion in credit losses and writedowns worldwide since the global credit crisis began. Many of those losses stemmed from mortgage-related investments that declined with the collapse in the housing market.

Narrowed Spreads

The so-called Libor-OIS spread, a gauge of bank reluctance to lend, has narrowed to 28 basis points from 364 basis points on Oct. 10. Greenspan said in June 2008 that he wouldn’t consider credit markets back to “normal” until the Libor-OIS spread narrowed to 25 basis points.

Lawmakers and some economists have blamed Greenspan for helping to cause the financial crisis with lax oversight of the housing boom and derivatives markets, and by keeping interest rates too low in 2003 and 2004.

Greenspan has responded that a surge in growth in China and other emerging markets led to an excess of savings that pushed global long-term interest rates down between early 2000 and 2005, contributing to the housing boom. In congressional testimony last October, he conceded his free-market ideology shunning regulation was flawed, adding he was “partially” wrong in opposing regulation of derivatives.

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