Greenspan Sees One-Third Chance of Recession in 2007 (Update2) (

By Craig Torres

March 6 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said there's a ``one-third probability'' of a U.S. recession this year and the current expansion won't have the staying power of its decade-long predecessor.

``We are in the sixth year of a recovery; imbalances can emerge as a result,'' Greenspan, 81, said in an interview yesterday at his office in downtown Washington. ``Ten-year recoveries have been part of a much broader global phenomenon. The historically normal business cycle is much shorter'' and is likely to be this time, he added.

Greenspan's outlook contrasts with the prediction of his successor Ben S. Bernanke, who told Congress last week that the economy may strengthen this year. Bernanke's upbeat assessment helped steady stock markets on Feb. 28 after a plunge the day before that some traders attribute partly to Greenspan's musing that a recession couldn't be ruled out.

Financial markets took the comments in stride today. The Standard & Poor's 500 Index was up 1 percent at 12:30 p.m. New York time, following stock-market gains in Asia and Europe. Ten- year U.S. Treasury notes fell 5/32, lifting yields 2 basis points to 4.51 percent. A basis point is 0.01 percentage point.

``It is possible that we can have a recession at the end of this year,'' said Greenspan, who ran the central bank for 18 years until January 2006. Bernanke, 53, declined to comment.

Capturing the Trend

Little more than a year after leaving the central bank, Greenspan is returning to economic forecasting, a role he enjoyed before entering government service in 1974, during the administration of President Gerald R. Ford. He isn't trying to predict a number for gross domestic product or inflation: He's trying to capture the trend and when it might be about to change.

Private-sector economists and policy makers are calling for the expansion, which began in 2001, to continue. The Fed expects the economy to grow between 2.5 percent and 3 percent this year, and 2.75 percent and 3 percent next year, according to forecasts presented to Congress last month.

Greenspan said he has been careful to avoid making life difficult for his successor.

His contracts with clients stipulate that there will be no reporters present and no recordings. He said he tries to have an exchange with an audience, where he often learns something that helps him hone skills he has worked on for 50 years.

Seeking Anonymity

``I was aware of the problem that if I stayed public, I could make it difficult for Ben,'' he said. ``For the most part it has worked. I was beginning to feel quite comfortable that I was fully back to the anonymity I was seeking.''

``I was surprised at this recent episode,'' he added.

Investors may have taken notice of his comments on Feb. 26 because they considered them prescient. The day after he mentioned the risk of a recession to a Hong Kong audience on Feb. 26, a Commerce Department report showed sales of non- military capital goods excluding aircraft dropped 2.7 percent in January, the biggest decline since September 2001. Orders slumped by the most in three years.

Broader capital spending is also weakening. Corporate purchases of equipment and software declined at an annual rate of 3.2 percent last quarter, the biggest decline since the final three months of 2002, according to separate Commerce Department figures.

Greenspan said he doesn't believe that so-called point forecasts, where economists hone their outlook down to decimal points, can be accurately made in the near-term. ``We really can't forecast'' the economy over the next two years, he said.

Investors said financial markets are playing down Greenspan's recession risk message today.

Assuaging the Market

``It's not the message we're getting from the Fed,'' said Bernd Wuebben, senior bond market strategist at BNP Paribas New York. ``All Fed speakers have tried to assuage the market.''

Greenspan worked for what is now the Conference Board, a New York-based business group, as an industrial-metals analyst from 1950 to 1953. Tracking inventories, he was able to come up with a model of final demand. He expanded that model to textiles, aluminum and oil.

He found that large-scale models that used aggregate data averaged out the nuances and changes he could pick up at an industry level. Finally, some of the assumptions of firms' pricing power simply didn't hold as the post-war years unfolded.

``I realized I was trying to see how the world works in the context of individual entities,'' Greenspan said.

Under his chairmanship, the Fed staff began surveying firms directly from the Board of Governors' building in Washington on how their businesses were doing.

Anecdotal Information

``We certainly devoted some resources to our own gathering of anecdotal information,'' said Michael Prell, former head of the Division of Research and Statistics, the central forecasting unit at the Fed. ``Every other week, we would contact some subset of a sizeable group of firms.''

Greenspan's unique discipline both frustrated and amazed Fed colleagues, especially those trained in sophisticated economic modeling.

``His great value is that he has an idiosyncratic approach,'' said Laurence Meyer, a Fed governor from 1996 to 2002 who often sparred with the chairman over the outlook. ``The reason why Greenspan gets and deserves disproportionate weight is that he doesn't get caught up in all the themes that tie together in a consensus forecast. He is looking at all the different strands of data.''

Ingots

Once, Meyer said, he was sitting in a meeting with the Fed staff discussing the inflation implications of import prices. Out of nowhere, he recalled, Greenspan asked about steel-ingot prices. Meyer said he wasn't even sure what an ingot was.

``Why would I ever even ask that?'' Meyer, a founder and vice chairman of the model-based forecasting firm Macroeconomic Advisers LLC in St. Louis, said in an interview.

Macroeconomic Advisers isn't forecasting a recession this year, and Meyer said markets ``over-responded'' to what the former chairman said.

``Who wouldn't agree that it is possible we could have a recession?'' says Meyer. ``I think we are closer to the middle of an expansion than the end of an expansion.''