Greenspan Says Recession Possible, AP Upgrades To "Likely"

The moment the Associated Press slapped the title "Greenspan Warns of Likely U.S. Recession" on this article, its pants spontaneously combusted.

Greenspan did no such thing.  The most dire prediction the former Fed chief made (in the AP's own words) was this:

"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.

"Slowdown", of course, not equally "recession", which requires negative growth (and two consecutive quarters of it, at that).  We've already encountered a slowdown.  That shouldn't be news.  The new Fed Chairman Ben Bernanke has been attempting to engineer an economic "soft landing" from the hypergrowth the economy put on at the peak of the current cycle about a year ago, a feat he appears to be on the verge of completing successfully, avoiding both problematic inflation and recession.  In the most recent quarter, GDP growth popped up to an above trend 3.5%.

Whether or not we do slip into a couple quarters of contraction has (as Greenspan is reminding us) yet to be seen.  The situation most likely to bring this about appears to be the case in which the Bernanke Fed proves overly inflation-hawkish and hikes rates another time or two (rather than continuing to stand pat or even beginning to ease rates later this year, assuming inflation stays at bay and growth continues to moderate).  If they over-hike, we could indeed find ourselves suffering an unnecessary, man-made recession.  With the Fed's throttle at its current setting, however - despite likely being somewhat more restrictive than neutral - the soft landing (with no recession) looks to be in play.

Still, one never knows what shocks lay around the corner, ready to wreak havoc on a robust economy for a few quarters.

Greenspan said that while it would be "very precarious" to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

Of course that's true.  That's always true.  If asked whether during the entirety of his tenure as Chairman, Greenspan had ever encountered a year in which he could rule out the possibility of a recession, I'm confident his answer would have been no.

Commenting further about the impact of contraction in the housing market (whose weakness identifies it as the economic sector most likely to be responsible for triggering any natural recession this cycle might endure), Greenspan noted just how unlikely that outcome now appears.

We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing...

Goldilocks remains alive and vibrant, thanks to those powerful vitamins she took a few years back.  Slow/moderate growth gradually creeping back up to moderate growth, with near full employment and low inflation serving as a stable backdrop, enabling the Fed to ease up a hair, just enough to give the economy a touch more gas, constitutes the ideal scenario for sustainable real economic growth.

Nothing about what Greenspan said indicates that scenario is any less likely.  To characterize his comments as suggesting a recession by year-end is "likely" is simply, grossly misleading.