What Greenspan Got Right–And Wrong

Alan Greenspan cautioned that a recession is possible this year.  He’s right, as we’ve been saying for some time.  (However, a recession is not our best estimate, we keep reminding folks that it’s a distinct possibility.)  Greenspan is right that people should give it some thought.  We’ve offered our four steps for contingency planning for economic changes, including recession.

Here’s where Greenspan’s wrong, at least as quoted in the press:  "When you get this far away from a recession, invariably forces build up for the next recession . . ."  The statistics don’t support this idea.  If you calculate the frequency of an up year being followed by a recession year, the odds of a recession don’t change as the expansion gets older.  We’re just as likely to fall into recession two years into an expansion as ten years into an expansion.  There is no inexorable force leading to recession.  Most recessions result from policy errors by the Federal Reserve, but I’ll also accept other contributing factors, such as supply shocks, exogenous changes in business attitudes toward capital spending, technological change, etc.  But these forces are not correlated with the length of the expansion.

Business Strategy Implications:  Do some contingency planning, but do not assume that the recession will automatically come because the expansion is getting gray.