Falling Prices, Production Point to Rate Cut (Futures say .75)
By Vince Golle, Vincent Del Giudice and Carlos Torres 03/16 12:20
Washington, March 16 (Bloomberg) -- Wholesale prices of goods excluding energy products and food dropped last month and industrial production fell, government reports showed, raising expectations the Federal Reserve may cut its benchmark interest rate three-quarters of a point next week to buoy the economy.
The so-called core producer price index declined 0.3 percent in February after rising 0.7 percent in January, the Labor Department said today. Last month's drop, the largest since August 1993, was led by lower prices for autos, computers and paper.
Production at U.S. factories, utilities and mines fell 0.6 percent in February, twice the drop expected by economists, after a similar decline in January. It was the fifth straight monthly decline, the longest such string since a six-month slump from October 1990 to March 1991, the heart of the last recession.
Today's economic picture ``certainly increases the chances'' Fed officials will cut the overnight bank lending rate three- quarters of a percentage point, to 4.75 percent, on Tuesday, said Cary Leahey, senior economist at Deutsche Bank Securities Inc. in New York. ``The Fed tends to give the market what it wants and the market is clamoring for a 75 basis point cut.''
The U.S. Treasury's 10-year note was little changed, with its yield at 4.79 percent. Nine of the 25 bond dealers who trade directly with the Fed changed their rate-cut forecasts to three- quarters of a percentage point from a half point this week after U.S. stock declines raised concern consumer pessimism about the economy would place a further drag on growth, according to a Bloomberg News survey. The Nasdaq Composite Index dropped 5.5 percent this week and the Dow Jones Industrial Average lost 5.8 percent.
Stocks Fall
The stock indexes continued their losses today. The Dow fell 43 points, or 0.4 percent, and the Nasdaq fell 15 points, or 0.8 percent.
The economy grew in the fourth quarter at a 1.1 percent annual rate, the slowest in 5 1/2 years. That's resulted in the lowest level of consumer confidence since 1996, leading to declines in company profits and stocks. In response, the Fed's policy-setting Open Market Committee cut the overnight lending rate a full percentage point in two moves in January.
One reason central bankers were able to cut rates that much was because price increases other than for energy have ``remained subdued,'' Fed Chairman Alan Greenspan said last month.
Overall, producer prices rose 0.1 percent after rising 1.1 percent a month earlier.
Energy, Food
Energy prices rose 1.4 percent in February, after rising 3.8 percent in January, led by a 19 percent surge in the cost of liquefied petroleum gas.
Food prices rose 0.6 percent after rising 0.8 percent in January. The increase was paced by more expensive vegetables, fish and chicken. Higher energy costs are a reason H.J. Heinz Co. will fire 1,900 people, the Pittsburgh-based company said yesterday.
Wholesale auto prices fell 1.5 percent in February, the largest decrease since a 1.6 percent fall in July 1997. That followed a 1.2 percent January increase, the most since a 1.4 percent rise in October 1999. Light truck prices fell 3.6 percent in February after a 0.3 percent increase a month earlier.
General Motors Corp. increased incentives at the beginning of last month, and DaimlerChrysler AG's Chrysler arm added discounts including a $2,000 cash give-back on some trucks at mid-month to help bolster sales.
Manufacturing has suffered the most from the economic slowdown. Factories reported production fell 0.4 percent last month after a 0.6 percent drop in January, the Fed reported today. ``The report just confirms how weak manufacturing is,'' Leahey said. ``You don't get a sense that the weakness is bottoming, if anything, you get a sense that the weakness may be spreading globally.''
Before today's report, analysts expected production to fall 0.3 percent in February, according to a Bloomberg News survey.
In other reports today:
-- New home construction decreased 0.4 percent -- the first decline since October -- to an annual rate of 1.647 million units in February from a 1.653 million pace in January, the Commerce Department said in a separate report. The annual pace of construction in February was close to the 1.593 million units built last year, the third best since 1987, suggesting housing is still a bright spot for the economy.
-- The University of Michigan's preliminary index of consumer sentiment for March rose to 91.8 from a final reading of 90.6 in February, people with access to the study said today. Excluding February, the index than it's been at any time since October 1998.
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Fed Funds Rate anticipates .75 basis point cut:
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