Sat, Oct 27, 2001 page19

• Downturn may drag on despite Fed adjustment

  Recently, a few of the key US economic indicators have been even weaker than expected, suggesting that a full-scale recovery could be quite difficult for policy-makers to bring about quickly

  • By David Leonhardt / NY TIMES NEWS SERVICE
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  With the US Federal Reserve cutting interest rates and Congress vowing to pass a large stimulus package, economists have said that the current downturn could end up being a short one.

  The economic shock from the Sept. 11 terrorist attacks would make the slowdown worse, many analysts said, but the reaction would get the economy growing again by the start of next year.

  That outcome has suddenly begun to appear less certain.

  In recent days, a handful of economic indicators have been even weaker than expected, suggesting that a recovery could be difficult for policy-makers to bring about quickly.

  Businesses are continuing to cut their spending, layoffs are still mounting, and consumers are displaying growing signs of hesitation.

  After the release of a new round of statistics on Thursday, bond prices rose as investors bet that the US Federal Reserve was now almost certain to lower its benchmark short-term interest rate by another half-point before the end of the year.

  Stocks fell broadly in the morning but recovered in the afternoon, with the Dow Jones industrial average closing up 117.28 points, or 1.25 percent, at 9,462.90.

  The Commerce Department said on Thursday that companies' new orders for durable goods -- typically expensive items that last at least three years -- fell 8.5 percent in September, to US$165.4 billion, their lowest level since 1996. Meanwhile, sales of existing homes dropped 11.7 percent last month, the National Association of Realtors said on Thursday.

  The economy continues to suffer this month, too. Commodity prices, which reflect demand for raw materials, remain low. Jobless claims rose to 504,000 last week, climbing above 500,000 for the second time in recent weeks, the Labor Department said Thursday; the level had not previously been as high since 1992.

  With every other large economy in the world struggling as well, the US could have difficultly emerging from its slowdown in the coming months, according to a growing group of investors and analysts.

  "We are in a global, synchronized recession," said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute in New York. "Those are really hard to get out of," Achuthan said, because companies cannot shift their resources to economies that are still growing. The last recession to be so widespread occurred in the mid-1970s and lasted for almost a year and a half.

  Now, government officials are trying to rouse the economy by cutting interest rates, lowering taxes and increasing spending.

  With the support of the White House, the Republican-led House of Representatives passed a US$100 million stimulus package on Wednesday, consisting mostly of tax reductions they say will spur new spending.

  Democratic leaders in the Senate are proposing a smaller bill -- about US$70 billion -- that would give less money to businesses while subsidizing health-care coverage for unemployed workers.

  Already, the Federal Reserve has lowered its federal funds rate to 2.5 percent, from 6.5 percent, since the start of the year. That makes it less expensive for businesses and consumers to take on new debt and lowers the cost of their existing debt, giving them more cash to spend.

  But even before the attacks, the economy seemed somewhat unresponsive to the Fed's push, and many economists blamed the unusual nature of this downturn.

  Recessions in the US typically begin with consumers cutting their spending, often in reaction to interest-rate increases brought about by Fed officials worried about inflation. Sales then decline, businesses lay off workers and consumer spending drops further.

  This year, however, companies were the first to cut their budgets, as many executives realized that their earlier sales projections -- made in the heady late 1990s -- had been far too optimistic. Having added more workers, more factories and more equipment than they need, companies have cut spending severely over the last year.

  Still, only about 75 percent of the nation's industrial capacity is now being used, the lowest level in 18 years, and profits are still falling.

  "There will be further rounds of layoffs," said Michael Evans, the chief economist of the American Economics Group, a consulting firm in Washington. In the current circumstances, he added, lower interest rates and taxes will not be enough to persuade many companies to increase spending immediately.

  "There's no magic bullet," Evans said.
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