Tuesday, August 18, 2009
By Emily Kaiser
WASHINGTON (Reuters) - The U.S. economy is probably due for two strong quarters of economic growth to close out 2009, but the recovery may falter next year, former Federal Reserve Chairman Alan Greenspan said on Monday.
"I think we're OK for the next six months," Greenspan told Reuters in an interview. "We are getting a recovery in (housing) starts and motor vehicles, but the process doesn't have legs to it."
Auto sales and housing, normally the driving forces behind economic recovery, got a boost from government efforts such as the $3 billion "cash-for-clunkers" trade-in program, which encouraged consumers to buy new cars, but it may not be sustainable.
Greenspan, who stepped down as Fed chairman in 2006 after 18 years at the helm, said the U.S. market for autos was "saturated," with 20 percent more cars and light trucks on the road than there are licensed drivers.
With U.S. consumers' finances still shaky after three years of housing market declines, new vehicle sales may fade once the clunker program's cash is exhausted.
As for new home sales, a sharp drop in construction is helping homebuilders clear inventory, but Greenspan said it was unlikely that the rate of U.S. homeownership would return to the boomtime peak, which will keep home sales subdued.
While he has been lauded for presiding over the longest uninterrupted period of economic growth in modern U.S. history from 1991 to 2001, his record has recently come under harsher scrutiny.
Some economy watchers note that it was during Greenspan's tenure at the Fed that the housing bubble inflated.
Critics argue that under his leadership, the Fed kept short-term borrowing costs too low for too long after the 2001 recession, sowing the seeds of the housing and easy credit bubble that contributed to the financial crisis.
Greenspan has defended his record repeatedly, saying global forces overwhelmed the U.S. central bank's efforts to raise borrowing costs.
He has also maintained that bubbles cannot be detected until they burst. (BUNK!)
What gives him confidence that the last half of 2009 will generate strong growth is primarily a sharp drop in inventories of goods.
Consumption has been running about 1-1/4 percentage points above the level of economic output. In order to close that gap, companies need to make more goods, which would generate gross domestic product growth on the order of 4 percent to 5 percent if it happened all in one quarter and 2.5 percent per quarter if spread out over six months.
A rebound in stock markets since March 2009 lows may also add some fuel to the recovery by helping companies obtain cheaper sources of funding and rebuilding household wealth."The 50 percent rise in corporate equities in the United States, and more than that in the rest of the world, has created an important buffer for debt," he said. "The consequent major contraction of yield spreads across the globe has added more fiscal stimulus than anybody realizes." (THIS IS TOTALLY ARTIFICIAL & WILL DISAPPEAR AGAIN!)