Retail, manufacturing suffer as U.S. economy weakens
NEW YORK – The headlines each day tell of an increasingly sick economy: Montgomery Ward is closing its doors after more than a century in business. Xerox is eliminating 3,200 jobs. Ford and Chrysler are idling plants to work off unsold vehicles. Apple Computer and Bank of America are lowering profit projections.
Worried that the economy is sinking fast, the Federal Reserve last week lowered interest rates by half a percentage point, and further rate cuts are expected.
Economists say it’s too early to say unequivocally that there will be no recession, and most predict that there will be at least two more quarters of pain before the Fed’s interest-rate medicine takes full effect.
”The Fed is in some ways a lagging indicator in that it follows the economy,” said Sung Won Sohn, chief economist at Wells Fargo & Co. ”Lowering interest rates is a validation, a proof, that the economy is weak.”
The Fed hopes its interest rate cuts will boost consumer and capital spending, which have been the main engines of economic growth for the past 10 years.
”Retail sales have obviously weakened,” said David Orr, chief economist at First Union Corp. in Charlotte, N.C. ”What’s hurting the most right now are the big-ticket, interest-sensitive consumer items like cars and TVs and other things that are postponable.”
On the business side, ”amid profit warnings coming out in machine-gun fashion,” capital spending appears to be deteriorating, he added.
”One of the reasons the Fed did what it did was to try to reassure business managers that it was safe for them to continue those capital spending investments,” Orr said. ”I think they’re looking for a psychological impact, hoping to forestall fear paralyzing investment.”
Another boost to the economy could come from the tax cuts promised by President-elect Bush. But it remains unclear when such cuts will be enacted, and there usually is a long lag time before tax-law changes have an economic impact.
And a potential drag on any recovery is the continuing high price of oil and natural gas, which drains money from consumers’ pockets while significantly raising the costs of fuel-dependent industries, such as electric utilities and airlines.
So far, heavy industry has been hardest hit. In fact, Jerry Jasinowski, president of the National Association of Manufacturers, says ”much of manufacturing is on the verge of recession.”
In the worst shape, he said, are factories that make basic products such as paper and steel. Last month, LTV Corp. of Youngstown, Ohio, became the ninth steel company to file for bankruptcy protection in the past two years.
Jasinowski said he expected the Fed rate cut to stimulate the stock market, which ”should help capital spending for equipment by giving firms greater confidence as well as the wherewithal to make such investments.” He added: ”That will help high-tech as well.”
Sohn of Wells Fargo analyzed the beneficiaries of Fed rate cuts over the past two decades.
”The sectors that did the best were semiconductors, wireless telephones, retailing, financial services, pharmaceuticals and communications equipment,” he said. The reason, he added, is that lower interest rates reduce their cost of capital.
The industries that didn’t do as well after rate cuts, Sohn said, were ”home building, steel and iron industries, airlines and basic materials industries from aluminum to copper.”
The banking industry also is feeling some pain, in part because of the weakening technology sector and volatile markets. Several banks – notably Bank of America and First Union, both based in Charlotte, N.C. – have announced potential write-offs of nonperforming corporate loans.