Brokerage predicts 100 bp interest rate cut by next year
nationalpost.com
Continued gloom is causing economists to postpone their predictions for an imminent recovery and demand even deeper interest rate cuts to kickstart activity.
New York investment bank Bear Stearns & Co. said yesterday the U.S. Federal Reserve could cut its overnight interest rate target a full percentage point by early next year -- a drop that would mean the central bank would have slashed rates by an unprecedented 3.75 percentage points in a 12-month period.
"The economy is, at best, dead in the water," said Brian Wesbury, chief economist at Griffin Kubik Stephens & Thompson in Chicago. He said that stock prices could head for new lows as further grim news unfolds.
Jack Guynn, head of the Federal Reserve Bank of Atlanta said that no rebound is likely before late 2001 or early 2002. "The adjustment process is just taking longer than I, and I think many other people, thought that it would. Everything that we sense at the moment is that [the economy] hasn't turned around." Mr. Guynn had previously expected an upturn in the second half of 2001.
The bleak views follow a Fed survey of regional U.S. economic conditions that portrayed a still-stagnant economy. The Beige Book was so dismal that David Rosenberg, chief Canadian economist and strategist at Merrill Lynch & Co., called it "one depressing colour" saying it was "one of the most lopsided downbeat reports delivered in at least three years." In the summary section prepared by the San Francisco Fed, Mr. Rosenberg counted 20 uses of the words "slow" and "weak."
As a result of the report, most observers now expect a further interest rate reduction of 0.25% on August 21 when the U.S. central bank next meets. Another 0.25% cut could follow later in the year although economists at HSBC also anticipate the same 1% drop foreseen by Bear Sterns.
Consensus expectations for today's Canadian July employment report are for marginal job gains of no more than 5,000. There is a widespread belief among analysts that another month of net job declines would cause the Bank of Canada to lower interest rates at the next rate announcement on August 28.
The Bank of Canada has been less aggressive than the U.S. Federal Reserve, cutting rates four times so far this year for a total of 1.5 percentage points.
"What amazes us -- and what we fear may be some catch-up ahead -- is that during the past three months during which the [help wanted index] has sagged 13 points, the jobless rate has not budged at 7.0% and the economy has actually managed to generate 22,000 net new jobs," said Mr. Rosenberg of Merrill Lynch.
Initial U.S. jobless claims for the week ending August 4 rose as expected to 385,000, while claims for the week previous were revised higher to 352,000, an indication that U.S. labour markets are staying soft this month after July's net job declines.
In Canada, July housing starts fell precipitously to 151,800, a 13.4% monthly decline that was well below the expected 165,000 starts total.
U.S. retail sales are down as price-conscious shoppers head for Wal-Mart Stores Inc., Target Corp. and other discount outlets, according to retailer reports released yesterday. Companies such as Exide Technologies, the largest automotive-battery maker, are eliminating jobs because business has slowed.
"The labour market isn't likely to turn around," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc. in New York. "The profit squeeze is still intense and it's affecting consumer spending. There's a lot going on that is going to keep the economy from snapping back strongly."
Mr. Guynn also said the U.S. economy will avoid a recession because tax cuts, interest rate reductions, decreased inventories and lower energy costs are supporting the economy.
"I think there's a good chance that we will in fact be able to get back to a better growth rate without seeing it go negative." A recession is defined as two consecutive quarters of negative growth. So far, growth has remained positive in both the U.S. and Canada but at reduced levels not seen since immediately prior to the 1990-1991 recession.
Mr. Guynn said that growth would not go back to the "heady" numbers of recent years.
"I think when we come out of this, and the orders begin to come back, we're going to have companies that are better positioned to compete both domestically and internationally than was the case before," he said. |
