NEW YORK (Dow Jones)--Fed policy makers may ultimately have to conclude that
they've done all they can for the economy's sickest man, the manufacturing
sector.
That's the view of many Wall Street economists, who note that the latest
data on the factory sector show it is nowhere near emerging from the morass
it's been descending into over the last half year.
Unfortunately for the folks involved in manufacturing, their sector is of
diminished significance in the U.S. economy these days. It's the service
sector that matters, accounting for around four-fifths of the economy, and
that's been both where the resilience has been and where better times are
expected to first emerge later in the year.
With its focus thus overweighted toward services and retail, the Fed is
expected by most economists to start slowing down its policy of monetary
easing, putting a halt to rate cuts by its August 21 policy meeting.
A Dow Jones survey conducted Friday expects the Fed to cut its overnight
target rate to 3.75% at the end of the June 27, followed by one more cut to
3.5% by Aug. 21, and then to offer nothing else through the rest of the
year. Markets themselves are pricing for a recovery next year and for a
resulting rise in interest rates.
The Bad Versus The Expected-To-Get-Better
For months now, virtually all news on manufacturing has been bad news. The
latest came from the Fed itself, whose industrial production report Friday
showed factory output falling 0.8% in May to the lowest level since August
1983. Several weeks ago, the National Association of Purchasing Management
said that its May index fell to its lowest level since July 1997.
By contrast, the consumer sector has held up reasonably well. Although the
pace of retail spending growth was reported Wednesday to have slowed in May,
when sales clung to a modest 0.1% rise, an upward revision to a 1.4%
increase for April pointed to reasonably strong net sales growth for the
quarter so far.
Thanks in no small part to this support from the consumer spending, the
economy continues to skirt conditions that most economists call a recession,
even though the government recently revised down its estimate of first
quarter gross domestic product to 1.3%.
There's no doubt the growth numbers haven't been great numbers, especially
compared to the boom years, and analysts predict that there likely to be
more softness ahead. But they, and Fed policy officials, are generally
looking for better performance into the end of the year once the effects of
the Fed rate cuts combine with those of a recently inked tax relief cut.
The upcoming force of these stimulative factors, many say, will be the
dominant driver of monetary policy. Indeed, it's central to the expectation
for the funds rate to settle at 3.5% by late August.
Blunt Tool
"You can't assume that the Fed will continue to ease because it sees signs
of recession in the factory sector" and disregard better performance
elsewhere, said Kathleen Stephansen, economist at Credit Suisse First
Boston. She was referring to the inflationary dangers of the Fed
over-stimulating the economy.
In part, much of manufacturers' woes result from inventory overages that
don't have quick fixes, and that are still ongoing in various parts of that
sector, Stephansen said. That's a process that will take time to resolve,
she said.
Richard Berner, chief U.S. economist at Morgan Stanley in New York, said
"monetary policy is aimed at the economy and at inflation, and not at just
one part of the economy," said Richard Berner, chief U.S. economist with
Morgan Stanley in New York.
And as the Fed shepherds the economy it has but "one instrument," namely the
ability to change interest rates, to accomplish those policy goals, he said.
That's not to say that monetary policy isn't an enormous power tool, but
that it's one that policy makers and economists repeatedly acknowledge as
"blunt" and difficult to employ on behalf of a single sector of the economy.
So if manufacturers remain in the doldrums, the Fed may simply have to live
with it, many economists argue.
"Certainly, manufacturing would complain" if the Fed engineered a recovery
that didn't include it, said Cary Leahey, economist with Deutsche Bank in
New York.
"But we had a period in the 1980s... with weak manufacturing and a growing
service sector" that the Fed lived with because there wasn't much else it
could do about it, he explained.
-Michael S. Derby, Dow Jones Newswires; 201-938-4192;
michael.derby@dowjones.com |
