Interest Rate Cut Likely as Factories See Major Decline
A tame inflation report for December and a recession-caliber falloff in manufacturing appeared Wednesday to eliminate any obstacles to another cut in interest rates by the Federal Reserve later this month.
The Fed said U.S. manufacturing shrank 1.1% in December, the biggest decline since the recession year of 1991. And the Labor Department said the consumer price index rose 0.2%, the same pace as in the prior two months. Prices excluding energy and food rose 0.1%, the smallest gain in a year.
“We are already deep into a slowdown,” said Steven Wieting, economist at Salomon Smith Barney in New York. “You really won’t see a meaningful rebound until the second half of the year.”
The absence of inflationary pressure, combined with weakness at manufacturers ranging from General Motors Corp. to furniture-maker La-Z-Boy Inc., pave the way for Fed policymakers to again cut interest rates in a bid to prolong the nation’s nine-year economic expansion, analysts said.
Central bankers next meet Jan. 30-31, and investors expect them to cut their benchmark overnight bank lending rate, now 6%, by at least a quarter percentage point.
The economic expansion slowed in December as retailers reported lackluster sales growth and manufacturers suffered from declining domestic demand and rising energy costs, according to the Fed’s latest regional economic report card.
“Growth slowed in December,” the Fed said in its survey, commonly known as the beige book. “High input costs, the strong dollar and weaker domestic demand were cited the most often as reasons for the slowdown in factory activity.”
In an effort to guard against recession, the Fed cut its key rate a half-point Jan. 3. The Fed’s statement following the decision warned that economic weakness was more of a threat to the expansion than accelerating inflation.
The report on December consumer prices showed declines in the costs of gasoline, apparel and tobacco. Gasoline prices fell 1.7%, the report showed. The price of gasoline at the pump averaged $1.48 a gallon last month, down from $1.56 a gallon in November, according to Energy Department statistics. In November, gas prices rose 0.3%.
Clothing costs fell 0.4% in December, the same decline as November’s. Stores lured shoppers with steep price cuts during the holiday shopping season.
For all of last year, clothing prices fell 1.8%, the third straight annual decrease and the biggest yearly decline since a 2.9% drop in 1952.
The overall U.S. inflation rate in 2000 was 3.4%, the biggest increase since a 6.1% surge in 1990, also a year of sharply higher energy costs.
Outside food and energy, however, consumer prices rose a more moderate 2.6% for all of last year.
The manufacturing report Wednesday showed that not even the largest increase in utility generation since December 1989 was enough to lift overall industrial production last month. Utility production rose 6.5% in December as cold winter weather gripped much of the country. Excluding the surge in utility generation, industrial production slumped 1% in December, Fed officials said.
Car and truck production fell 4.7% in December after falling 3.6% in November. Production of furniture fell 1.4% in December after falling 1.1% a month earlier.
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Consumer Price Index
Monthly percentage change, seasonally adjusted:
December: 0.2%
Source: Bureau of Labor Statistics
