Economy may need new rate cut

The US economy has slowed enough in the past few weeks that the Federal Reserve may move to cut interest rates – perhaps by as much as half a percentage point – when it meets next week.

At a slower pace, the economy is more vulnerable to extraneous events. An unexpected spike in oil prices or a 1,000-point stock market drop may be enough to push America back into recession next year.

The fresh economic worries come despite news yesterday that gross domestic product grew by 3.1 percent, about twice as fast as the prior quarter. The economy was spurred largely by Americans visiting car lots to take advantage of cut-rate financing. But the GDP numbers were a bit slower than expected, and economists don't think sales at car dealerships kept the same pace in October.

"The momentum has weakened significantly in the last couple of weeks," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

Behind the slowdown is lagging confidence, driven by talk of war and by a continuing tide of lay-off announcements.

As a result, consumers are finally pulling back from the car and homebuying binge. This caution is expected to continue through the holiday period, resulting in relatively lackluster sales. And business, uncertain about the economy and perhaps waiting to see if Congress gives it inducements, is slow to invest in new equipment, plants, and people.

With neither consumers nor business pulling out their wallets, economists believe the Federal Reserve will have to provide new stimulus – either a quarter- or half-point cut in short term interest rates.

"To be effective, monetary policy must have some element of surprise, so a half a point is more effective than a quarter of a point," says Mr. Sohn. "Otherwise, the Fed may be wasting its ammo."

The economy is slowing just as Americans get ready to vote in state and congressional elections. Still, though most Americans list the economy as a major concern it's not expected to play a large part in the election. "The economy is usually not so much of an issue for the mid-term as it is for presidential elections," says David Wyss, economist at Standard & Poor's in New York. "Voters tend to hold the president responsible, not Congress."

Even in areas where the economy is weak, it has not become part of the political debate. Take Philadelphia, where the unemployment rate is 7.9 percent and has been high for some time. None of the three Democratic congressmen from the city faces a serious challenge, and the state of the economy is not part of the campaign.

"I think a lot of people in Philadelphia are convinced that all is being done that can be done," says Dave Bartelt, chair of the geography and urban studies department at Temple University there. "It's like shoveling sand against the tide."

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