Thursday, November 30, 2000

After Six Rate Hikes, Big Oil Surge, Is U.S. Economy Finally Rolling Over? By Charles Oliver

Investor's Business Daily

Over the course of the last year, the U.S. economy has gone from white-hot to red-hot to merely lukewarm. Now some economists are starting to ask whether it could turn stone cold next year.

The latest report of gross domestic product did little to ease their fears. GDP grew at just a 2.4% annual rate in the third quarter – the slowest pace in nearly four years.

Also, retail sales slipped, and corporate profits showed weak growth.

The Commerce Department report on gross domestic product, the country's total output of goods and services, harshly underscored the impact of soaring oil prices and six interest rate hikes on economic growth and corporate profits.

And while most analysts say the economy will continue to grow next year, a growing number are predicting a mild recession in 2001.

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Image: Anatomy Of A Slowdown

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In fact, even many of those who expect continued growth are a bit more gloomy, revising their forecasts for growth next year downward.

Most economists say that low growth has changed the conversation at the Federal Reserve. Instead of pondering interest rate hikes at their meetings, policy-makers will discuss interest rate cuts, experts say.

Financial markets also are pricing an about-face by the Fed. Fed funds futures on the Chicago Board of Trade – a contract based on the monthlong average of the overnight fed funds rate – reflects a 50% chance of a quarter-point rate cut by Feb. 28.

The 2.4% growth rate was far from the 5.6% rate in the second. It also was a downward revision from the 2.7% initially reported – and in line with views.

"The revised data confirm that the slowdown has arrived, and the remaining question is how hard the landing will be," said Jerry Jasinowski, president of the National Association of Manufacturers.

He said manufacturing may suffer more than the overall economy. Producers are hurt by a need to work off excess inventories, as well as by the poor demand for U.S. exports.

Meanwhile, U.S. corporations' after-tax profits rose by just 0.6% in the third quarter, the weakest performance in nearly two years, the Commerce Department said. That's down sharply from a 2.5% rise in the second quarter and was the poorest showing since a 1.6% drop in the fourth quarter of 1998.

GDP growth for the past three years has averaged more than 4% each year. The 2.4% GDP increase in the third quarter was the weakest showing since a 2% gain in the fourth quarter of 1996.

The downward revision was blamed on a bigger trade deficit than originally estimated, less business investment and a smaller buildup in business inventories.

The Federal Reserve began raising interest rates in June 1999 to head off inflation and to bolster the record-breaking economic expansion, now in its 10th year.

The Fed's goal is to engineer a soft landing, in which growth slows enough to relieve inflation pressures being built up by too much money chasing too few goods.

But even as the Fed was raising rates, oil prices were surging. They more than tripled in the last two years.

Meanwhile, the federal government has maintained a tight fiscal policy – high taxes and big surpluses – that keeps money out of the private sector and reduces demand.

Now some economists have begun to worry these three forces may be pushing the U.S. into a recession.

"There likely will be a mild recession next year," said Kenneth Safian, president of Safian Investment Research, an investment adviser in White Plains, N.Y.

Besides falling growth, economists say there are other signs of trouble.

The four-week moving average of jobless claims has been climbing steadily since October.

This is a clear sign that the pace of hiring is easing, and that those receiving unemployment insurance are taking longer to find new jobs.

Consumer confidence has been falling since August, the Conference Board said. It fell to 133.5 in November.

That's well below expectations and its lowest reading in a year.

With consumers feeling less confident, retail sales have started to slow.

Sales at retail stores edged up just 0.1% in October, following a sizzling 0.9% jump the month before, the Commerce Department said.

It marked the weakest showing since August, when sales were flat. Doubts were rekindled about the strength of the coming holiday retail shopping season.

And firms are finding it harder to get loans. Earlier this month, the Fed said more than 40% of domestic banks reported tighter standards for loans to large and midsize firms over the past three months.

For loans to small firms, about one-fourth of domestic banks said they had tightened standards.

Several large banks have reported more problem loans than expected.

And banks aren't the only credit source drying up. The sagging stock market has left new firms reeling.

The Fed predicts that initial public offerings will comprise less than $20 billion in the fourth quarter, down from $60 billion in the first.

Meanwhile, Merrill Lynch & Co. reports that the share of distressed junk bonds reached 28% in November, the highest rate in nine years. The spike in problem bonds will make buyers more cautious – and less likely to buy them.

"This once wide-open credit spigot is now quickly closing, and with it the new economy's easy success," said Mark Zandi, chief economist at Economy.com.

Still, while the economy is slowing, it's slipping from a red-hot pace. And most analysts remain mildly upbeat – but their concerns are growing.

"I'd say the odds of a recession next year are 1 in 5, but if you'd asked me a month ago I would have put them at 1 in 8," said Jeff Thredgold, an economic consultant to Zions Bank in Salt Lake City.

Those worries have attracted the attention of Wall Street, helping to push stock prices down sharply in recent months.

http://www.investors.com/editorial/feature.asp?v=11/30

-- Martin Thompson (mthom1927@aol.com), November 30, 2000