The U.S. economy is picking up speed and may grow by 3 percent to 3.5 percent next year, former Federal Reserve Chairman Alan Greenspan said.
"The U.S. economy unquestionably has some momentum," he said in an interview last week in Washington. "The fourth quarter looks good. The growth rate could be 3.5 percent or more" for the final quarter of this year.
The economy grew at an annualized pace of 2.5 percent in the third quarter. A spate of recent statistics -- from rising retail sales to falling unemployment claims -- suggest it is gaining ground.
Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said last week that the Newport Beach, Calif.-based firm sees the economy expanding 3 percent to 3.5 percent in the fourth quarter of 2011 from the same period of this year. Greenspan called that forecast "reasonable."
The pickup in the economy should lead to stepped-up hiring as productivity growth tops out, he said. Employers in November added 39,000 workers to their payrolls, and the jobless rate jumped to a seven-month high of 9.8 percent.
"The unemployment rate should start coming down next year," Greenspan, 84, said. "The most you can expect is that it will get down to 9 percent, or the high eights, by the end of the year."
Greenspan, who now heads his own consulting firm, Greenspan Associates, sees stock prices climbing further as the growing economy boosts companies' sales and earnings.
"We are seeing a topping out of profit margins," he said. "Fortunately, revenues are beginning to rise. That will increase profits. As earnings rise, and because equity premiums are so high, stock prices should move higher."
The Standard & Poor's 500 Index has risen almost 12 percent this year as corporate earnings exceeded estimates, economic data improved, and the Fed purchased Treasuries to boost growth. The benchmark gauge for American equities closed above 1,242.87 last week. It will rise to 1,379 in 2011, according to the average of 11 strategists surveyed by Bloomberg News this month.
Greenspan warned that U.S. policy makers need to put the government's finances in order or face the risk of a debilitating rise in long-term interest rates.
"A bond market crisis is likely unless we do something about the budget deficit," said Greenspan, who served as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006.
He recalled what happened in 1979, when bond yields rose 400 basis points in five months on concerns inflation would rise. A basis point is 0.01 percentage point. "It happened with very little notice, and it was very scary," the former Fed chairman said.
The federal government recorded a $1.29 trillion budget deficit in the 2010 fiscal year that ended Sept. 30. Congress last week passed an $858 billion bill extending for two years all Bush-era tax cuts without requiring that the costs of the legislation be paid for with offsetting savings.
"There's a whole series of very positive and very negative forces in play," Greenspan said. "For the short run, there's momentum on the upside" for the economy.