Gloomy Greenspan warns of major recession for US economy*

· Weak housing market puts brake on retail spending
· New Fed chairman may be forced to cut interest rates

Larry Elliott and Ashley Seager
Saturday May 12, 2007
The Guardian

Further gloom gathered over the US economy yesterday as retail sales
lurched lower while former Federal Reserve chairman Alan Greenspan
issued a fresh warning that the world's largest economy could be heading
for a major recession.

New figures showed retail sales in the US unexpectedly tumbled last
month, hit by a double whammy of higher petrol prices and a crumbling
housing market.

Retail sales are being closely watched since US consumers have helped
keep the world economy afloat in recent years, borrowing against the
rising value of their houses to finance spending.

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Retail sales fell 0.2% in April from March, according to the commerce
department, against expectations of a 0.4% rise. They follow weak gross
domestic product growth figures for the first quarter and poor
employment, or non-farm payroll, numbers for April which showed the
slowest growth for more than two years.

American consumers spent $372bn (£188bn) last month, a vast amount but a
smaller one than had been expected, giving rise to speculation that the
Fed, under new chairman Ben Bernanke, may start cutting interest rates
later this year.

Fed rates are currently at 5.25%, where they have been for almost a
year, and are now lower than rates in Britain after Thursday's rise from
the Bank of England which took the cost of borrowing in Britain to a
six-year high of 5.5%.

"This was a bad set of data, and throws a further question mark over
whether the US economy is going to stumble out of the current slowdown,
or be sucked deeper down into a recession," said Rob Carnell at ING
Financial Markets.

That was a point taken up by the legendary former Fed chairman. Although
retired for more than a year, Mr Greenspan made yet another intervention
into the economic debate, saying he saw a one-in-three chance of a
recession this year.

Financial markets were not too rattled by the bad retail sales data,
however, as separate data on so-called "core" producer prices, which
exclude volatile food and energy costs, were unchanged from March -
suggesting that inflationary pressures may be benign, making it easier
for the Fed to cut rates. The Dow Jones industrial average, for example,
was nearly 100 points up on the day while the dollar held its ground on
the foreign exchanges.

The retail sales figures are the latest evidence that the world's
biggest economy is cooling under the weight of higher interest rates and
a depressed housing market.

Following a prolonged period in which consumer spending was underpinned
by a booming real estate market, the breakdown of yesterday's retail
sales figures showed that the weakness of America's housing market is
starting to put the brake on consumer spending. A 2.3% drop in spending
at building material stores was one of the factors behind the decline in
retail sales.

Following the short-lived recession prompted by the collapse of the dot
com bubble, the US economy was revived by a boom in the housing market
generated by a cut in interest rates to 1%, the lowest in half a
century. Over the past couple of years, however, the steady increase in
interest rates has exposed problems in the sub-prime mortgage market -
initially easy-term loans extended to enable borrowers on low incomes to
get a foot on the property ladder.

Last month, the Commerce Department in Washington reported that the US
economy grew at an annual rate of 1.3% in the first quarter of 2007, the
slowest rate of expansion in four years.