New Economic Figures Add to Pressure on Fed
Three new sets of data painted a picture Monday of an American economy weakening across the board, increasing pressure on a resistant Federal Reserve Board to reduce interest rates at a crucial policy-making meeting scheduled for Wednesday and Thursday.
The three reports, which show a drop in Americans’ personal income, a scaling back of construction spending and a contraction of the manufacturing sector, suggest that the Federal Reserve may have overshot its goal in its recent effort to reduce economic growth to an inflation-free level.
The key unknown factor facing the central bank is whether the slowdown represents the leading edge of a new recession and warrants lower interest rates or whether it is nothing more than a continuing adjustment after the economy burst out of recession in 1992.
“It’s a very close call,” said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles. “The economy is clearly at the cusp and no one knows whether the next step is deceleration or re-acceleration.”
The new reports found that:
* Personal income fell 0.2% in May, the first decline in more than a year. A drop in private sector wages and salaries led the way. But, the Commerce Department found, consumer spending--a large part of the economy--was up 0.7%. Economists took this as an encouraging sign that consumers are not so wary as to have halted all spending on expensive items.
* Spending on construction dropped 1.5% across the board in May, the largest such drop in four years and the second straight monthly decline.
* The overall index measuring growth in the manufacturing sector fell from 46.1% in May to 45.7% in June, according to the National Assn. of Purchasing Management, which represents 36,000 purchasing managers at manufacturing companies across the nation. A figure below 50% represents economic contraction and some economists consider a reading of 44% a certain sign of recession.
“Production, new orders, order backlogs, inventories and employment all decreased,” said Ralph G. Kauffman, chairman of the association’s business survey committee. He said that while prices of manufactured goods increased for the sixth month in a row, they did so at a slower pace than in the past.
David Hale, chief economist of Kemper Financial Services in Chicago, said “the data just strengthens the case for doing nothing” when the Federal Reserve meets.
“There is a good case to be made for watching and getting additional information,” he said.
Despite the at-best mixed nature of the reports, Wall Street appeared encouraged, and the Dow Jones industrial average closed with a 29.05-point gain, ending the day at 4,585.15.
The interest rates charged by the Federal Reserve to member banks, which were ratcheted up steadily throughout 1994, have been unchanged for five months. During the 12-month period ended Feb. 1, the central bank increased the federal funds rate from 3% to 6%, boosting in seven steps the rate charged for overnight loans among its banks as it moved to put the clamp on potential, and then still invisible, inflation.
These rates generally set the pace for commercial loans by private banks, which in turn speed economic activity by making money more available with low interest, or slow it down by increasing the cost of borrowing.
On the personal income front, wages in the private sector fell at an annual rate of $19.9 billion in May, compared to an increase of $17.4 billion the month before. Government pay rose in May at an annual pace of $1.3 billion.
*
The overall drop in income was the first such decline since the index fell 0.6% in January, 1994. But the April report showed a mere 0.1% increase.
The drop in construction spending brought the adjusted annual rate down to $514.7 billion. The sharp drop of 1.5% in May followed a decline of 0.2% in April. Spending on the construction of single-family homes dropped 2.5%, following a 2.3% drop in April.
However, consumer spending was considered particularly strong and a good sign for the economy as a whole because it represents two-thirds of the nation’s economic activity.
Spending for major durable goods--a classification including automobiles and large appliances--rose 2.5%, a level indicating that consumers remain ready to spend for big-ticket items.
While such data as that made public on Monday suggests a broad slowdown in the national economy, there is no certain answer to whether the Federal Reserve under Chairman Alan Greenspan will decide the decline is sufficient to warrant interference by the central bank. There has been no emerging consensus among economists on what steps the Fed is likely to take when its rate-setting Open Market Committee meets Wednesday and Thursday.
The reports issued Monday follow two reports from late last week that suggested diverging paths.
The government reported on Friday that purchases of new homes had soared unexpectedly. But two days earlier, a private organization said that consumers’ confidence in the economy--which can be taken as a predictor of spending and other economic behavior--had tumbled.
The surprising 19.9% surge in new home purchases, fueled by lower mortgage rates, was the biggest one-month jump since January, 1992. In addition, the Labor Department said that after a 17-month high the week before, the number of people filing last week for jobless benefits was 28,000 fewer than the previous week--a suggestion that growth in unemployment was tapering off.
