Investors are wondering if a quarter- or half-point will be cut from interest rates.
MILWAUKEE – Not since the Great Depression has the United States suffered through such a protracted hiring slump as during the past 27 months.
The job blight has persisted, repeatedly dashing predictions of a rebound, despite an all-out economic stimulus by the Federal Reserve, which has cut its benchmark interest rates 12 times over the past 2-1/2 years and shepherded them to 41-year lows.
And now Alan Greenspan, the cool-and-calculating Fed chairman, seems ready to act again. Although the wobbly economy hardly appears to have responded to his past lending rate reductions – which amount to the Fed’s most aggressive economic revitalization effort during Greenspan’s 16-year tenure – many observers are betting that the Central Bank will ratchet rates lower once again Wednesday when it concludes a two-day meeting.
“It will be an insurance policy on this recovery,” said Steve Cochrane, senior economist at Economy.com, an economic forecasting firm in West Chester, Pa.
“They want to err on the side of caution,” said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.
Financial markets have grown so confident that the Fed will deliver an interest rate cut that investors’ only question is whether the Central Bank will lop a quarter percentage point off its 1.25% overnight bank lending rate or a more generous half percentage point, Anderson said.
Nothing left to cut
The mere fact that another Fed move is under discussion is a sign of how murky the outlook remains for the world’s biggest economy. The Fed has lowered its rates so often that it’s running out of room to cut further.
Its 1.25% benchmark stands at the lowest point since 1961. If the Fed cuts it by either a quarter percentage point or half a percentage point, the key rate will be at its lowest level since July 1958.
“Things would be worse if they hadn’t done what they have done,” said Jay Mueller, chief economist at Strong Capital Management in Menomonee Falls.
Even so, another credit easing will wipe out most of the Fed’s remaining monetary ammunition, forcing the Central Bank to find unconventional ways to kick-start the economy if it swoons again in the current business cycle.
“You can only cut short-term rates to zero and, as a practical matter, you don’t want to go to zero,” Mueller said. “So, conventional policy is nearing an end.”
Deflation a fear
To many, Greenspan remains a comforting figure. Some liken the owlish 77-year-old economist, who has served as Fed chairman under four presidents, to an oracle. But as the economy drifts deeper into uncharted waters, his skills are being tested as never before.
Although some of the economic indicators have begun to curl upward in recent weeks, and the stock market has exhibited newfound confidence, few dispute that the nation’s commercial health remains fragile. False starts and aborted recoveries already have dogged the $10 trillion-a-year U.S. economy since the downturn began in March 2001.
And, perhaps most frightful, the Fed has served notice that it is vigilant against what it calls “corrosive deflation” – a broad decrease in prices that shatters confidence and decimates earnings as consumers indefinitely postpone their purchases on the premise that everything will become cheaper the longer they wait. Deflation creates a self-perpetuating downward spiral when it entrenches itself and becomes devilishly difficult to reverse.
No less an authority than Michael Moskow, the president of the Federal Reserve Bank of Chicago, has raised the possibility that the wavering economy could lapse into a renewed period of weakness.
“We could continue to have below-potential growth for an extended period of time,” Moskow said in a speech last month, echoing fears that faint growth may be a fact of life for years to come.
Moskow, who will attend this week’s Fed meeting, was quick to add in his speech that “the fundamentals to generate growth appear to be in place.”
Other government officials, such as Treasury Secretary John Snow, also remain upbeat and expect an acceleration in the second half of the year.
Indeed, by the rude measures of economic output alone, the economy is expanding. But it remains incapable – so far – of creating more jobs than it loses.
The hiring slump has confounded the National Bureau of Economic Research, a group of respected academics in Cambridge, Mass., who make the official declarations when each recession begins and ends. With no end in sight to the layoffs, the bureau has been unable to define an ending to the downturn that began in March 2001.
“Could we still be in recession? Yes,” said Donna Zerwitz, a bureau spokeswoman. “Could the recession that began in March 2001 have ended and we now are in a recovery? Yes. Could the recession that began in March 2001 have ended and a recoveryensued and then a new recession has begun? Maybe.”
Other downturns worse
Nationwide, employment peaked in February 2001 and has fallen almost continuously since, creating the longest sustained period without job growth since the period before World War II, according to an analysis of seasonally adjusted non-farm payroll data from the U.S. Bureau of Labor Statistics.
The economy shed 2.5 million jobs since the peak in early 2001. In manufacturing employment alone, the nation’s factories suffered a 13.5% drop in employment in the past two years.
Measured in other ways, however, other recessions have been more punishing to the labor market. In May, the latest reported month, unemployment rose to a nine-year high of 6.1%, meaning the 1991-’92 recession – when the unemployment rate peaked at 7.8% – was deeper.
In Wisconsin, the employment downturn is a major reason why Economy.com has declared that the state economy itself is mired in “recession.”
The forecasting firm employs its own definition of a recession, which it describes as a simultaneous contraction in employment and industrial output. Under that reckoning, Economy.com concluded that Wisconsin slid into “recession” in September 2000 and has yet to emerge – “as has most of the industrial Midwest,” Cochrane said. Most other economists define a recession as two consecutive quarters of decline in total economic output.
According to the Wisconsin Department of Workforce Development, the state lost 51,300 jobs between March 2001 and March 2003.
Hangover continues
Reasons for the “jobless recovery” are many. States are groaning under an unprecedented budget crisis that has led to cuts in teachers and services; fears of terror attacks have dampened the economic outlook; uncontrolled increases in health care costs have put a squeeze on workers and businesses alike; and the economies of Japan and Europe are both stagnant, depriving the global economy of any single regional growth engine.
Any Fed rate reduction this week could prompt a debate on how much of a bang the Fed can get for its buck.
“I’m not convinced it will do much of anything,” said Mueller at Strong.
“The economy already had begun to get better on its own,” Mueller said. “The Fed can cushion the blow, but there is no policy answer to correct the excesses of a boom that turned into a bubble. You just have to live with the consequences of that for a while.”
A Fed cut would give a boost to stock prices and send a confident signal from Wall Street to Main Street, economists say.
In a time of low expectations, Victoria Marklew, an economist at Northern Trust Corp. in Chicago, summed up the Fed’s objectives.
“Another rate cut helps consumers continue to feel happy,” she said.
—
(c) 2003, Milwaukee Journal Sentinel.
Visit JSOnline, the Journal Sentinel’s World Wide Web site, at http://www.jsonline.com/
Distributed by Knight Ridder/Tribune Information Services.
AP-NY-06-24-03 1724EDT
Comments are no longer available on this story