Economy Hurting, May Need Fed Salve
Tue April 01, 2003 12:19 PM ET
By Wayne Cole
NEW YORK (Reuters) - U.S. manufacturing suffered a surprisingly severe slowdown in March, a report on Tuesday showed, feeding fears that the economy as a whole may be contracting.
There were also signs of consumer fatigue, with surveys on chain store sales showing a marked deterioration last month.
In normal times, such grim news would have financial markets baying for the Federal Reserve to cut interest rates. But these are far from normal times, and enough of the weakness could be blamed on war anxiety for optimists to cling to hopes that activity would soon revive.
That view limited the reaction in markets, where equity and bond traders were in a very hesitant mood, though futures on interest rates reflected an increasing chance of another rate cut.
"It's clear the economy has had a couple of dismal months; signs are activity contracted in February and maybe March as well," said Rory Robertson, interest rate strategist at Macquarie Equities.
"The case for a policy easing is building and while not everyone at the Fed may be over the line yet, if the data remains this weak they'll have to bite the bullet eventually," said Robertson, who covers the U.S. economy for the Australian bank in New York.
The turning point could come as soon as Friday, when the March labor report is released. Analysts are expecting a soft report, with payrolls seen falling 29,000 after February's alarming 308,000 plunge, and anything worse would put intense pressure on the Fed to be more accommodative.
"On Friday, we will probably see more job losses. This will put a drag on the economy at least through the end of the year," said Vince Boberski, chief economist at RBC Dain Rauscher in Chicago.
"The chances increase significantly for a 50-basis point rate cut by the Fed by its June meeting. I won't rule out an inter-meeting rate cut of 50 basis points," he added.
Official rates are already at a four-decade low of 1.25 percent, which is one reason analysts assume the Fed is reluctant to cut unless the dangers are clear and present.
MIGHT OR MIGHT NOT
The problem right now is that nothing is clear. The Fed itself has complained that geopolitics made things so uncertain that it could not separate the impact of war from what might or might not be underlying weakness in the economy.
Likewise, the Institute for Supply Management's report on Tuesday on manufacturing attributed much of the slowdown in activity to caution related to the war.
Its index of manufacturing business conditions dropped sharply in March, to 46.2 from 50.5 in February, well below analysts' expectations of a decline to 48.6. That was the weakest reading since November 2001, when the economy was reeling from the aftershock of the Sept. 11 attacks.
A reading below 50 indicates contraction in the manufacturing sector and often in the economy itself.
The influence of the ISM report was underlined by a recent study from the Dallas Fed that suggested the index has good predictive power for the economy as a whole, as well as future moves in monetary policy.
The survey also contained worrying omens for the labor market, with its employment index falling yet further in March to stand at just 42.1.
The grim outlook for jobs has been a major concern highlighted in recent surveys of consumer confidence and could be one reason spending has tapered off in the last two months.
Two surveys of chain store sales released on Tuesday found many retailers complaining that shoppers were staying at home to watch the news on Iraq -- what economists have come to call the "CNN effect."
The measure compiled by the Bank of Tokyo-Mitsubishi and UBS Warburg showed sales fell 1.4 percent, the biggest weekly drop so far this year. The Redbook survey of chain stores found sales fell 1.7 percent in the four weeks ended March 29, compared with the same period the prior month.
Even the once-resilient auto sector has felt the pain, with figures due later on Tuesday expected to show overall sales of cars and trucks declined for a third month in a row in March.
Such is the malaise that auto giant General Motors GM.N has had to launch its most aggressive incentive program ever, offering zero percent five-year financing on every model -- including top-of-the-line Cadillacs and Corvettes -- except for its Hummer sport utility vehicle.
That will put pressure on Ford F.N and Chrysler to match it, further squeezing corporate profit margins. It will also likely drag down car prices and could pull inflation even lower, giving the Fed more room to cut rates if necessary.
reuters.com |
