Interest rate cut expected while firms face closures

Monday, November 5, 2001

The Federal Reserve is expected to cut interest rates for a tenth time this year when policymakers meet Tuesday.

The expected rate cuts comes as the United States and the world economy continues to deteriorate, especially after the Sept. 11 terrorist attacks.

Economists see another rate-cutting move this week as a certainty, following remarks made by Federal Reserve Chairman Alan Greenspan and other Fed officials in recent weeks that the country's year-long struggles with a weakening economy are not yet over.

The first reductions this year were half-point moves, marking the most aggressive Fed easing since early 1982 when the Fed was slashing rates to fight the country's worst recession since the Great Depression.

Some economists now believe the Federal Reserve will cut interest rates again, but are pinning their hopes on more fiscal policy -- not slow-acting policies like an increase in the minimum wage or capital gains tax cuts.

President Bush wants Congress to quickly pass a package aimed at stimulating the economy through new tax cuts and increased government spending. Economists have proposed ideas from a tax discount to some tax-free days.

The economy has been spiraling downward over the past six months, and the September terrorist attacks only worsened the decline.

Federal Reserve Bank of St. Louis president William Poole recently said in a speech at the University of California that the Sept. 11 terrorist attacks on the U.S. have hurt the economy in the short term.

The latest edition of the Federal Reserve's Beige Book, a collection of information compiled from various business and community leaders which highlights economic developments across the nation and in the Fed's Eight District, indicate weak economic activity in September and the first weeks of October.

A lot of people were interested in this month's Beige Book because of its reports on effects from the terrorists attacks, said Poole.

In all districts a period of sharply reduced activity followed the terrorist attacks.

Business activity recovered quickly from some aspects of the shock, such as reduced air cargo capacity but longer-run effects are more difficult to assess. Retail sales, other than autos, were slightly lower than before Sept. 11, but the weakness was in economic forecasts. The same is true for manufacturing. Insurance premiums have increased, and security precautions are disrupting productivity.

Retail sales softened in September and early October in almost all districts. Auto sales fell at the beginning of the period but have now rebounded following new zero-financing incentive plans.

Economic activity in the Eighth District has continued to slow, particularly in the manufacturing sector.

The residential real estate market has softened, and some parts of the district are also seeing softer commercial real estate markets. Total loans by district banks are down slightly, but the recent trend toward stricter loan standards has become less pronounced.

Although crop conditions and yields have been mixed, corn and soybean yields have been better than expected throughout the Eighth District, which includes eastern Missouri, all of Arkansas, western Kentucky, western Tennessee, Southern Illinois, southern Indiana and northern Mississippi. The Fed's Eighth District has headquarters in St. Louis and branches in Little Rock, Ark., Louisville, Ky., and Memphis, Tenn.

Some manufacturers face cutbacks, closures

Districtwide, boat, auto and tire, furniture, packaging, carpet, and electronic materials plants are among those facing cutbacks and closures, citing reduced orders and weak consumer confidence. In contrast, contacts in northeast Arkansas note that, although there is little talk of expansion in the manufacturing sector, talk of impending layoffs or closures has actually decreased.

Service industry contacts report flat-to-slowing activity throughout the district. In response to diminished air travel, increasing costs, and narrowing profits, the Northwest Airlines hub in Memphis cut 1,100 jobs and reduced services. Following the terrorist attacks, the trucking industry experienced a brief increase in activity while air service was grounded, but has since seen freight volumes decline. Auto manufacturers stopped production for a week to allow sales to catch up with inventories, although this did not involve any permanent worker layoffs.

Manufacturer incentives, including 0 percent interest rates, have helped to bolster sales of new autos, but not by as much as some dealers had hoped. Retailers, too, note flat sales. Nonetheless, they express guarded optimism as they prepare for the holiday season, which could make or break their year.

Residential real estate sales in the district were mixed over the past six weeks following the events of Sept. 11. Agents in Louisville and Little Rock report a drop in housing sales, while sales in northern Mississippi and Memphis remained steady. Without lower mortgage rates, sales levels would have been lower. Realtors throughout the district say that the number of appointments to show homes also is down from a year ago.

Residential construction still looks strong, with an increase in monthly building permits throughout most metropolitan areas.

A recent survey of senior loan officers at district banks indicates tighter standards for commercial and industrial (C&I) loans to technology firms in the last three months. Credit standards for commercial real estate loans, residential mortgages, consumer loans, and credit cards were largely unchanged.

Retail sales followed much the same pattern throughout the country. Sales of groceries, security devices, and bottled water increased and purchases of insurance also rose.

The grounding of aircraft caused some very short-run effects. For example, the transport of fresh vegetables from the West Coast to the East Coast was disrupted somewhat. The supply chain of parts to manufacturers also was interrupted but appeared to recover quickly from dislocations in air transportation, as air cargo was promptly rerouted through ground networks.

All districts except Boston and Kansas City reported sharp declines in the hotel, airline, and tourism industries. In many districts, demand dropped sharply immediately following the attack but later rebounded partially. Some canceled conventions have been rescheduled. In Manhattan, Broadway theaters have noted some pick up in attendance after a sharp drop-off in mid-September.

B. Ray Owen is the business editor for the Southeast Missourian.

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