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Greenspan sometimes fumbles forecasts for economy

Published November 21, 2006


Financial markets have to quit hanging on Alan Greenspan's every word. That's because the former Federal Reserve chairman's economic forecasting skills aren't always right.

A review of some important events in recent economic history - such as the dot-com implosion in 2000 or the 1990 recession - shows that Greenspan has had some big misses.

Two years ago, for example, he said that the jump in oil prices was a "transitory" factor boosting inflationary pressures. Crude oil was trading at $40 a barrel at that time; today, prices are less than $60 a barrel, and that's down from a high topping $78 a barrel over the summer.

Of course, all economists get things wrong, but when others do, the entire financial world isn't listening.

Greenspan told attendees at an economic conference this month that the "worst is behind us" in the economic effect of the housing slump. He said strong profit margins and capital spending are good signs of what's potentially to come.

"The economy is obviously going through a significant slowing period, which, as best I can tell, is more than likely temporary," Greenspan said.

Such a positive outlook sounds comforting given that U.S. economic growth slowed to a weaker-than-expected 1.6 percent annual rate in the third quarter - the lowest since the 1.2 percent growth rate seen in the first quarter of 2003 as the nation prepared for the war in Iraq.

Many in financial circles think the slowing economy and moderating inflationary pressures will allow the Fed to keep interest rates steady.

But before anyone hangs their hopes on Greenspan's predictions that better times could be ahead, the economics team at Merrill Lynch took note of some of his forecasting fumbles from the past.

Greenspan told his Fed colleagues on the Aug. 21, 1990, Federal Open Market Committee meeting, where interest rate policy is set, that a recession wasn't likely in the cards.

"I think there are several things we can stipulate with some degree of certainty; namely, that those who argue that we are already in a recession, I think, are reasonably certain to be wrong," Greenspan said.

But as Merrill chief North American economist David Rosenberg notes, it would later be known that the recession had started in July of that year.

Then there was a March 6, 2000, speech, which came just as the unprecedented bull market was peaking. Greenspan said that "the capital spending boom is still going strong indicates that businesses continue to find a wide array of potential high rate-of-return, productivity-enhancing investments. And I see nothing to suggest that these opportunities will peter out any time soon."

"But peter out they did," Rosenberg said in a note to clients.

It's too soon to tell if Greenspan is getting it right or wrong this time around. A year from now, maybe things will really be looking up, and Greenspan's view eventually will be correct. But from the way things seem now, betting on Greenspan's outlook would be risky.

[Last modified November 20, 2006, 22:21:03]

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