Elusive rebound is ever just ahead

The Fed began slashing rates seven months ago without much impact. It meets again Tuesday.

Like the water mirage on a highway through the desert, the recovery in the United States economy keeps shifting ahead.

When the Federal Reserve began slashing interest rates in January, many economists expected to see the makings of a rebound early in the second half of the year. Typically, when the Fed adds fuel to the economy, the infusion of money has a noticeable impact within six to nine months.

Now, more than seven months into a period of aggressive Fed action, most economists still expect America to escape a recession. But forecasters have been trimming their growth predictions, and recent news has disappointed. Ford Motor Co. said Friday it would cut 10 percent of white-collar jobs. Technology and manufacturing are in deep slumps. Consumers are spending, but more cautiously.

Given all this, the Fed is expected to trim interest rates tomorrow - the seventh time this year. The question is, when will it make a difference?

An upturn "remains a hope yet to be fulfilled," notes Randell Moore, who conducts the monthly survey of economists from Kansas City, Mo.

At this time, most economists see a pickup beginning before the end of the year. The consensus of nearly 50 economists surveyed earlier this month by Blue Chip Economic Indicators is that national output will grow at a teeny 1.7 percent annual rate in the current quarter and 2.8 percent in the last three months of the year.

That's a bit faster than the snail's pace of 0.7 percent in the second quarter, a shaky number that may soon be revised downward.

The forward-looking outlook will probably also sag, Mr. Moore predicts, when he talks to the 50 economists again in two weeks.

What's behind the mirage-like vanishing recovery?

Essentially, the slowdown hit harder than many expected.

Just a little more than a year ago, in May 2000, the Fed was worried about torrid growth and possible inflation, not recession. It raised interest rates by half a percentage point.

But at the same time, the economy was getting whacked by higher energy prices. Meanwhile, the technology boom hit a wall as the Internet build-out went too far, too fast and stocks plunged.

Now, even as the Fed tries to stimulate growth, many firms are still retrenching.

Positive forces at work

Economists still expect that lower interest rates, the tax rebates now in the mail from Washington, and a drop in energy prices will eventually turn the economy around.

Already, lower interest rates have helped many consumers - buoying home and retail sales.

Lower energy prices, also, is acting like a tax cut. Lower gas-pump costs free up cash for buying other items.

Another consequence of the prolonged slowdown has been a fall in the value of the dollar. Since the beginning of July, the dollar has fallen almost 10 percent against the euro - the currency of the 11 nations in the European Monetary Union. Against Japan's yen, the dollar has tumbled nearly 4 percent in a week.

Eventually, this should make American exports cheaper and imports more expensive, stimulating American production.

Michael Cosgrove, an economist at the University of Dallas in Irving, Texas, forecasts an upturn in either the fourth quarter or early next year. But he would like the Fed to cut rates at least half a percentage point to provide more money for the economy.

Instead, most Fed-watchers expect a quarter-point cut at tomorrow's meeting in Washington.

Paul Kasriel, an economist at the Northern Trust Co., sees economic recovery as "imminent." The Chicago-based economist notes that the leading economic indicators, a group of statistics compiled by the Conference Board in New York, have been signalling an upturn for three months. The report for July is due today. Based on historic statistical averages, the upturn should occur about now.

Last week, White House economists joined the forecasting crowd in trimming their growth estimates to 1.7 percent, after inflation, for the year. That's the same number as the Blue Chip consensus.

Political fallout

The shift has political as well as economic significance.

It means the federal budget surplus will be smaller. The Office of Management and Budget on Wednesday will put the overall surplus for fiscal 2001 ending Sept. 30 at about $160 billion, White House spokesman Ari Fleischer said last Thursday.

Almost all of this surplus will be credited to the Social Security account. Little money will be left over for other purposes. Both Democrats and Republicans promise not to touch revenue for the Social Security Trust Fund.

Political fights over what money is left are widely foreseen.

Last May, the Congressional Budget Office said the overall surplus would hit $275 billion. But the tax rebates are using up some $38 billion of the surplus, and the slump costs further billions.

The White House predicts 3.2 percent economic growth in 2002 - higher than the Blue Chip forecast of 2.8 percent.

The difference is significant. The Congressional Budget Office reckons that just two-tenths of a percentage point in extra growth adds $29 billion in tax revenues.

Meanwhile, some worry that the economy could go negative.

"It gets worse before it gets better," predicts James Smith, at the University of North Carolina in Chapel Hill. He worries that a pickup in inflation will force the Fed to start raising rates - and drag the economy down.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK