May 5 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. has slipped into an ``awfully pale recession'' and may continue to languish for the rest of the year.

``We are clearly receding,'' with economic growth now at about zero percent, he said in an interview with Bloomberg News. Greenspan, who now consults for clients including Deutsche Bank AG, also said it was too soon to declare the end to the credit crisis stemming from the collapse in the subprime mortgage market.

The former Fed chief's assessment echoes figures in the past month that show declines in manufacturing and housing industries, though fewer job losses than economists forecast. Greenspan's successor, Ben S. Bernanke, and his colleagues indicated last week they are ready for a pause in interest-rate cuts after seven reductions since September.

Greenspan spoke the day before the Federal Open Market Committee's April 30 statement, where it dropped a previous reference to ``downside'' risks to growth and noted ``uncertainty'' about the outlook for inflation.

While declining to comment on monetary policy, Greenspan said the economy is returning to a more inflation-prone period. Import prices are rising, as are wages overseas, adding to pressures already caused by soaring costs of food, energy and other commodities.

Bernanke is scheduled to speak on mortgage markets today at 8:30 p.m. in New York.

`Tug-of-War'

Greenspan, 82, portrayed the economy as being caught in a ``tug-of-war'' between cash-rich businesses on the one hand and money-losing financial institutions on the other. ``This is a very unusual situation,'' he said. ``Neither side is obviously winning the battle.''

The economy grew at a 0.6 percent annual rate over the last two quarters, the slowest pace since the 2001 recession.

Greenspan said that continued stagnation for the rest of this year may be the best the U.S. can hope for and might even be the most likely outcome. ``That's certainly the most benevolent scenario,'' he said. ``It's not all that far from being the most probable.''

``We're in a recession,'' he said. ``But this is an awfully pale recession at the moment. The declines in employment have not been as big as you'd expect to see.''

The government reported on May 2 that U.S. payrolls fell by 20,000 in April, compared with the median estimate of a 75,000 decline in a Bloomberg survey.

Unexpected Drop

The unemployment rate unexpectedly dropped to 5 percent from 5.1 percent in March.

Service industries unexpectedly expanded in April, signaling the damage from the housing slump and credit crisis may be dissipating. The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 52 from 49.6 the prior month, the Tempe, Arizona-based ISM said. Readings greater than 50 signal growth.

The former Fed chief said a recovery won't begin until home prices show signs of stabilizing, relieving pressure on financial firms to write off mortgage-related losses.

``Until there are stabilized prices of homes, and I think they have a good way to go down, you still have prospective losses'' for financial companies and investors. ``It's too soon to tell'' if the worst of the credit crunch is over, he added.

Home prices in 20 U.S. cities fell in February by the most on record. The Standard & Poor's/Case-Shiller home price index dropped 12.7 percent from the same month last year.

`Bottom Out'

``It is possible, not probable, that prices could bottom out'' toward the end of the year, Greenspan said.

He saw the economy reverting to the period prior to the 1990s, where inflation was more of a threat.

``The trade-off between inflation and growth is clearly turning adverse,'' he said. ``We're going back to where we were before the end of Cold War.''

Greenspan in the past has argued that the expansion of the global labor force brought on by the collapse of the Soviet Union and the rise of China was a powerful force bringing down global inflation. That trend is now fading as workers in the emerging markets obtain higher wages.

The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose 2.1 percent in March from 12 months before. Including the two items, prices climbed 3.2 percent, the fifth straight month in excess of 3 percent.

`Less Gloomy'

The former Fed chief did say he was less gloomy about the threat of protectionism compared with a few years ago.

``I'm clearly less pessimistic than I was two or three years ago, not because there hasn't been an increase in protectionism, but the rate of deterioration has been far less than I feared,'' Greenspan said.

Democratic lawmakers, after winning a majority in both houses of Congress in the 2006 elections, threatened to raise tariffs on imports from China and take action against Japan for allegedly keeping its currency too low. No such legislation has ever passed.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net.

Last Updated: May 5, 2008 10:46 EDT