Bad News May Signal New Interest Rate Cuts : Economy: Latest reports show manufacturing and construction down and a surge in jobless claims. New unemployment numbers are due today.
A flurry of bad economic news Thursday, including a decline in manufacturing, a drop in construction spending and a surge in new unemployment claims--coupled with expectations of a poor labor market report due today--fueled predictions of yet another round of interest rate cuts.
Economists said the Federal Reserve, under pressure to boost the nation’s sputtering economy, could lower interest rates as early as today, depending on the size of an expected increase in the nation’s unemployment rate, set for release this morning.
A large regional bank in New Jersey, First Fidelity Bancorp, underscored the likelihood of the interest rate cuts by dropping its prime rate to 5.5% from 6% on Thursday. Other major banks did not follow, however, choosing to wait for the unemployment figures--the last such report before the presidential election on Nov. 3--and the Fed’s reaction.
Some economists forecast that September payrolls would drop by 115,000 to 200,000 in the employment report. They also expect the unemployment rate to rise to 7.7% from 7.6% in August. California’s jobless rate stood at 9.8% in August.
If these economists are right, the Fed could lower its discount rate by half a percentage point to 2.5% or even lower, levels not seen since the late 1950s. The cuts are designed to lower rates for mortgage and personal loans and spur consumer spending.
Thursday’s gloomy economic reports underscored what many Americans have long since concluded: The nation’s economy has ground to a near standstill.
“We are still muddling along,” said Sandra Shaber, an economist with the Futures Group in Washington. “There’s no clear evidence that it’s going to get even worse, but there’s no sign it’s getting better.”
Investors on Wall Street reacted to the latest news by driving stock prices down. The Dow Jones industrial average fell 17.29 points to 3,254.37. Losing stocks topped gainers by 10 to 7 on the New York Stock Exchange.
But, in anticipation of another interest rate cut, the price of bonds surged. The benchmark 30-year government bond jumped 31/32 to yield 7.30%. The two-year note closed up 8/32 to yield 3.65%, the lowest yield in history.
The markets were also affected by the possibility that Germany might lower its interest rates. High German rates have been blamed for the recent currency crisis in Europe, and the Bundesbank has been under pressure to lower them.
The pressure for lower rates in the United States grew Thursday when the National Assn. of Purchasing Management reported a contraction in manufacturing in September; the Commerce Department said construction spending fell at the sharpest rate in nine months during August, and the Labor Department said weekly jobless claims hit a six-week high.
The closely watched purchasing management’s index fell sharply to 49% from 53.7% in August, surprising economists who had generally expected the manufacturing sector to either remain in a holding pattern or show slight improvement. A reading above 50% generally indicates that the manufacturing economy is expanding, while a rating below 50% indicates a decline.
New orders from the nation’s manufacturers declined sharply last month, the first downturn in 17 months.
“Although the overall economy continued to expand in September, the manufacturing sector ground to a halt,” said Robert Bretz, chairman of the group’s business survey committee.
The Commerce Department added to the day’s disappointing news, reporting that spending for new home, office and factory construction fell in August at the steepest rate of 1992.
Construction spending dropped 0.8% to a seasonally adjusted annual rate of $424 billion, the largest monthly decline since last November, when the rate fell 1.2%.
In another report, the Labor Department said new unemployment insurance claims in mid-September surged to a six-week high, reflecting the effects of hurricanes Andrew and Iniki and the strike at General Motors.
The number of Americans filing first-time claims for unemployment benefits in the week ending Sept. 19 climbed for the fifth straight week to 429,000, highest since Aug. 8. In California, nearly 69,000 filed for new unemployment benefits, 12.4% more than the previous week and the most since early August. The surge was blamed on layoffs by banks and aerospace and food-processing firms.
Construction Spending
Billions of dollars, seasonally adjusted rate
Aug., ‘92: 424.0
July, ‘92: 427.5
Aug., ‘92: 404.8
Purchasing Managers’ Index
The purchasing managers’ index tracks overall business activity at 300 industrial companies
Sept., ‘92: 49%
