BW: "Fed's Parry says economy faces further risks"
Robert Parry's Speech: "Three Questions about the Economic Slowdown"
frbsf.org
"Fed's Parry says economy faces further risks"
businessweek.com
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>>> 09-07-2001 15:53 ET
REUTERS NEWS
UPDATE 1-Fed's Parry says economy faces further risks
SALT LAKE CITY, Sept 7 (Reuters) - Federal Reserve Bank of San Francisco President Robert Parry said on Friday the U.S. economy still faced the risk of further weakness and the latest government jobs report showed unemployment rising at a 'very significant rate.'
In a speech on the regional and national economy at the Federal Reserve Bank of San Francisco's Salt Lake City branch, Parry said the U.S. economy was not yet in a recession although 'it certainly feels like one.'
The U.S. economy grew by a paltry 0.2 percent annualized rate in the second quarter of 2001 versus 4.1 percent in 2000. The latest government employment report released on Friday showed the sharp slowdown was prompting firms to slash costs by cutting payrolls. This sent the unemployment rate up to a four-year high of 4.9 percent in August from July's 4.5 percent.
The Fed president, who is currently not a voter on the Fed's rate-setting Federal Open Market Committee, said sliding stocks, slower global growth and a fall in consumer confidence could undermine the consumer spending that has so far kept the economy out of recession.
'What are the risks on the road ahead? One is that consumers might pull in their horns more than they have,' he said. 'Consumer spending has held up reasonably well. Indeed, it's the main reason the economy has not slipped into recession.'
Parry said he was more nervous that U.S. consumer confidence could fall after the unemployment rate spiked so sharply in August.
He said the employment report had shown unemployment 'increasing really at a very significant rate.'
'After our most recent meeting of the Federal Open Market Committee, we did say that the risks at the moment appear to be mainly on the downside. However the economy still has a lot going for it,' Parry said.
The Fed last cut rates on Aug. 21. It has cut rates seven times this year to take its key federal funds rate to 3.50 percent.
Parry said he expects the moribund economy to pick up modestly by the end of the year, with more acceptable growth likely in 2002.
'Are we likely to slip into a recession? Obviously there's no way to know for sure. But my best estimate at this point is that there will be a modest pickup in activity by the end of this year with more acceptable growth rates in 2002,' he said.
A recession is normally defined by economists as two back-to-back quarters of economic contraction.
Bright spots included the fact that consumer spending was holding up and that the Fed's aggressive cuts in key borrowing rates, which have totaled 3.0 percentage points so far this year, were easing rates on car and home loans.
Parry said higher trend productivity growth, the output per unit of labor, was 'a real strength' as was the fact that energy prices had turned around.
But the fact that growing trade links had interlinked the fates of major economies around the world much more than in the past posed additional risks to the U.S. economic outlook, he said.
'Part of the slowing in the world economy is due to our own slowing and that feeds back to us through a smaller demand for our exports,' Parry said.
15:53 09-07-01
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