Former Federal Reserve Chairman Alan Greenspan said the stock market will determine whether the U.S. will plunge into a recession.
“Strangely enough, it’s going to depend in large part on the stock market,” Greenspan told CNBC.
“We underestimate the wealth effect on the economy and this type of volatile stock market moves, it has an impact which I don’t think we fully understand nor measure correctly,” Greenspan said.
Wealth effect suggests people spend more when the value of their assets rise, CNBC.com explained.
“I think it’s important to recognize that if we get a major stock market adjustment, we are going to feel it in the economy which has very short leg,” said Greenspan, who led the central bank from 1987 to 2006.
Greenspan, 93, said the U.S.-China trade war is a “major global issue” and it’s “eroding” the global economy.
To be sure, recession talk has recently dominated Wall Street.
Nobel Prize-winning economist Robert Shiller warns that a recession could be “the undoing” of President Donald Trump.
Trump has for decades touted a glamorous narrative of his life by “surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence,” Shiller said in a recent op-ed in Britain’s the Guardian newspaper.
“The end of confidence in Trump’s narrative is likely to be associated with a recession,” Shiller warned.
The Yale School of Management economics professor explained that consumers respond to recessions by reassessing their views, spending less and avoiding making big-ticket purchases.
While Trump’s affluent lifestyle has been “a resounding inspiration to many consumers and investors … a severe recession may be his undoing,” Shiller warned.
“And even before economic catastrophe strikes, the public may begin paying more attention to his aberrations ― and to contagious new counter-narratives that crowd out his own,” Shiller said.
For his part, President Donald Trump has contended that the economy is "doing very well" and dismissed concerns of recession, offering an optimistic outlook late last month after a steep drop in the financial markets, the Associated Press reported.
"I don't think we're having a recession," Trump told reporters as he returned to Washington from his New Jersey golf club. "We're doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they're loaded up with money."
Larry Kudlow, Trump's top economic adviser, also played down fears of a looming recession and predicted the economy will perform well in the second half of 2019. In recent television interviews, he said that consumers are seeing higher wages and are able to spend and save more.
"No, I don't see a recession," Kudlow said. "We're doing pretty darn well in my judgment. Let's not be afraid of optimism."
A strong economy is key to Trump's reelection prospects. Consumer confidence has dropped 6.4% since July. The president has spent most of the week at his golf club in New Jersey with much of his tweeting focused on talking up the economy.
Meanwhile, a number of U.S. business economists appear sufficiently concerned about the risks of some of Trump's economic policies that they expect a recession in the U.S. by the end of 2021, the AP explained.
Thirty-four percent of economists surveyed by the National Association for Business Economics, in a report released late last month, said they believe a slowing economy will tip into recession in 2021. That's up from 25% in a survey taken in February. Only 2% of those polled expect a recession to begin this year, while 38% predict that it will occur in 2020.
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