Former Federal Reserve Board Chairman Alan Greenspan's statement that the U.S. economy could fall into recession this year helped to trigger not only the huge sell-off on the global stock markets Tuesday, according to financial analysts, but also started a debate on the health of the U.S. economy.
Greenspan told a Hong Kong audience that while a recession was possible late in the year, most forecasters thought it unlikely. Greenspan did observe that it is late in the business cycle and that corporate profits are unlikely to remain at present high levels.
Mainland Chinese markets Tuesday were already digesting the news that the authorities wished to impose a capital gains tax to discourage market speculation. The market fell by nearly nine percent, triggering a global retreat in markets, many of which had experienced a very rapid run up over the past two months.
Greenspan's worries have resonated here at home. Economist Douglas Cliggott, the chief investment officer at Dover Management, tells Bloomberg News his main concern is the weak housing market. "At the end of 2006 it looked like the U.S. housing market was stabilizing. That situation changed pretty dramatically when we got the housing starts data for January. That data was 38 percent below the year earlier level. And that sort of wiped out the view that housing was stabilizing," he said.
Cliggott believes a recession is likely sometime over the next year. The last economic downturn was shallow, a brief recession in 2001.
Henry Paulson, the Wall Street financier who became treasury secretary in July, disagrees. He told a Washington audience Thursday that the U.S. economy is making a successful transition to a somewhat lower pace of non-inflationary economic growth. "Recent data suggest that economic activity slowed in December and January, particularly in manufacturing. It is important to take a broad view of the economy and not rely on a single number or even data for a month or two in making a judgment. I'm watching developments carefully and I believe the U.S. economy is healthy," he said.
Paulson points to low unemployment, rising business and consumer confidence, rising exports and slowing inflation as positive economic signs.
For all of 2006 the U.S. economy grew 3.3 percent. Growth, as of now, is projected to be nearly as high in 2007.