Greenspan: Recession Still '50 Percent or More' Likely

     The economy isn’t out of the woods yet in spite of 3.3 percent gross domestic product (GDP) growth in the second quarter of 2008, according to former Federal Reserve Chairman Alan Greenspan.

     Greenspan appeared on CNBC’s September 9 “Closing Bell” and was asked by host Maria Bartiromo if he would stick with a prediction he made earlier this year that the United States would go into a recession.

     “Well, I said 50 percent or more and I still stand by that statement,” Greenspan said. “I think the real interesting question at the moment, with all of this financial problem – why is the economy in the world still in positive territory?”

     Greenspan was referring to the fact the United States has had only one quarter of economic contraction – in the fourth quarter of 2007 – followed by two quarters of growth – something he didn’t expect.

     “The United States is weakening, obviously, and it’s stagnant,” Greenspan said. “But we’re holding up and the developing world, while coming down from its dramatically rapid rates of increase, has slowed as well. And so, I think the real interesting question is why are we doing as well as we are?”

     The economy has fared much better than many have expected, including the media. On August 28, the Commerce Department announced that GDP actually grew at 3.3 percent in the quarter, far exceeding economists’ expectations of 2.3 percent. Initial figures reported a 1.9-percent increase.

     However, Greenspan warned of high-inflation rates on the other side of this economic slowdown in his CNBC appearance.

     “[I] think we’re undergoing a very extraordinary post-Cold War phenomenon, which as I point out in some detail, has led to a disinflationary process for a number of years but it is now turning,” Greenspan said. “And, if it weren’t for this extraordinary pressure we’re getting from the financial sector, we would see the emergence of inflationary forces and I do expect that to happen after the crisis is over.”

     The former Fed chief said the U.S. isn’t seeing high inflation now because of the downward forces on the current economy. He said the economy would see it in the intermediate future.

     “But obviously during the crisis, there is very little way in which inflation could come up because the pressures are clearly toward slower growth and slower inflation,” Greenspan added. “But when we get beyond this, I think we’ll see a reemergence of inflation, which we have not seen for years.”