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Greenspan says the stock market will determine whether there's a recession

Key Points
  • Former Fed Chairman Alan Greenspan tells CNBC the U.S.-China trade war is "eroding" the global economy.
  • "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 lag," Greenspan says.
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Former Federal Reserve Chairman Alan Greenspan said Wednesday the stock market will determine whether the U.S. is headed for a recession.

"Strangely enough, it's going to depend in large part on the stock market," Greenspan said on CNBC's "Squawk on the Street." "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." Wealth effect suggests people spend more when the value of their assets rise.

"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 lag," Greenspan said.

The 93-year-old former Fed chief also said the U.S.-China trade war is a "major global issue" and is "eroding" the global economy. The tit-for-tat tariffs roiled the stock market in August with the Dow Jones Industrial Average suffering its worst month since May. The U.S. manufacturing contracted for the first time in three years in August, the latest sign the trade war is exacerbating the economic slowdown.

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The bond market had repeatedly flashed its biggest recession warning last month amid the trade war escalation. The so-called yield curve inversion has been a reliable recession indicator historically, watched by many market experts and the Fed.

"Remember that we are in a period where if you are a chartist, you are probably getting a bit nervous where the market is headed," said Greenspan, who led the central bank from 1987 to 2006.

"I find it difficult to pick something out of the market that it does not already know," he added.

Despite the tariff-induced sell-off last month and in May, the S&P 500 is still up more than 16% in 2019.

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