Economy Slows; Fed Rate Cut Urged : Reports: Index of leading indicators declines for seventh time this year. Many--but not all--analysts expect a cut this month.
In a sign that the U.S. economy may need a helpful kick in the form of lower interest rates, the government’s chief forecasting gauge tumbled in October for the seventh time this year.
The index of leading economic indicators fell 0.5% to its lowest level in more than a year, the Commerce Department reported Wednesday, prompting some analysts to call on the Federal Reserve Board to reduce interest rates to keep the expansion alive.
More broadly, a growing number of economists maintain that employees fearful of being laid off, families whose credit lines are tapped out and an aging expansion all argue for an interest rate cut.
“The real puzzle is why they haven’t moved already,” said Edward E. Yardeni, chief economist with the C.J. Lawrence investment firm. “I think the evidence is fairly compelling that all the risks to economic growth are on the downside.”
The riskier outlook is based on recent reports that portray a lackluster job picture and wary consumers as the Christmas shopping season gets underway. Such key economic engines as manufacturing and retail sales also have sputtered in recent months.
Many economists expect the Fed to ease short-term interest rates soon, perhaps when its policy-setting committee meets Dec. 19. Indeed, that expectation is one reason that other rates, which the Fed does not control, have fallen in the last few weeks.
Politics is the other reason that rates have been dropping: Many people anticipate that the White House and Republican leaders will arrive at a plan to balance the federal budget and believe that the Fed will ease rates to help the economy through a period of deficit cutting.
“If the Fed doesn’t act soon, interest rates will rise,” said Bruce Steinberg, an economist at the Merrill Lynch investment firm.
While such views are widely shared, they are not unanimous. Some analysts believe that the economy’s underlying strength argues against lower rates, which could spark inflation and exacerbate an already tight labor market.
On Wednesday, for example, the government reported that construction spending increased in October by the largest amount in more than three years, fueled by gains in public spending and apartment building. A separate Fed report on regional economic conditions provided an ambiguous picture, noting slow growth and uneven Christmas sales, but rising pressure on wages.
Fed officials are nervous that the nation’s 5.5% unemployment rate leaves little room for job gains before workers are able to bid up wage rates.
“Everybody in the world is looking for the Fed to cut interest rates, either at this [December] meeting or the next one--but I don’t think so,” said Robert A. Brusca, chief economist of Nikko Securities in New York, adding: “If you look back in history, we’re at the point in the business cycle where the Fed should be nervous. We’re at the point where inflation should start to rise.”
There are 11 components in the index of leading indicators, and seven moved negatively in October: prices for industrial materials, which posted an unusually sharp decline; the length of the average workweek; the money supply; spending on plants and equipment; jobless claims, which rose to 367,000 from 352,000 in September; the pace of deliveries; and building permits.
Much of the drop in October’s leading indicators was dictated by the price slide for such industrial commodities as paper, wool and scrap metal.
By contrast, factory orders for consumer goods, unfilled factory orders for big-ticket products, consumer expectations and stock prices all signaled a growing economy.
Few economists were swayed one way or the other by the indicators, most of which had previously been reported. While it is often said that three consecutive declines in the index presage a recession, that truism does not stand scrutiny: The index dipped in February, March, April and May--reflecting a sluggish economy but not a dead one.
“You’ve got that leading index out there all by itself,” Brusca said, maintaining that a more critical overview of the economy suggests that growth will continue, with the help of long-term interest rates that have fallen almost 2 percentage points since late last year.
Market interest rates have fallen significantly in recent days, reflecting the bet of many investors that a weaker economy will prompt a rate cut soon, perhaps in the range of a quarter of a percentage point. Also, investors anticipate a budget deal in Washington, which would reduce the government’s future borrowing needs, a development that could lower interest rates.
* CORPORATE SCROOGES: Layoffs are mounting as firms flout holiday tradition. A1
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Leading Indicators
Seasonally adjusted index; 1987=100:
October 1995: 100.7
Source Commerce Department
Construction Spending
In billions of dollars, seasonally adjusted:
October 1995: $546.9
Source Commerce Department
