Sunday January 7 3:23 PM ET U.S. Retail, Manufacturing Suffer

By EILEEN ALT POWELL, AP Business Writer

NEW YORK (AP) - 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 inventories. Apple Computer and Bank of America are lowering profit projections.

Worried that the U.S. economy is sinking fast, the Federal Reserve (news - web sites) last week lowered interest rates a half a percentage point, and further rate cuts are expected in coming months.

But 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 economic pain isn't evenly spread, with some industries hit worse than others, and some parts of the country, too. If you're lucky, you work for an oil company in Texas. If you're unlucky, you're with the auto industry in Michigan.

The Fed hopes that its interest rate cuts will boost consumer and capital spending, which have been the main engines of economic growth for the past 10 years. Some sectors will respond quicker than others, analysts say.

``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 that have been promised by President-elect Bush. But it remains unclear when such cuts will be enacted, and there traditionally is a long lag time before tax-law changes have an economic impact.

A potential drag on any recovery are the continuing high prices for oil and natural gas, which have drained money from consumers' pockets while significantly raising the costs of fuel-dependent industries, such as electric utilities and the airlines.

So far in the slowdown, 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. Battered by imports and rising production costs, LTV Corp. of Youngstown, Ohio, last month 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.''

Still, inventories are piling up, especially among durable-goods manufacturers, ``which will put a damper on first-quarter production,'' he said.

That phenomenon can be seen in the auto industry, where December sales figures were depressed. General Motors said its sales were off 18 percent last month, while Ford's and Chrysler's were off about 15 percent.

``We don't believe December is a one-month aberration,'' Ford sales analyst George Pipas said last week. ``If we thought so, we would not have announced a first-quarter production cut on the magnitude we did.''

Sohn of Wells Fargo analyzed what industries have benefitted most from 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.'' That's because their conditions are more a result of the overall poor economy than credit costs.

The housing sector had been holding its own, but that could be changing.

David Seiders, chief economist at the National Association of Home Builders, noted that home sales, while down in November, were still at an annual rate of 909,000, which he labeled ``pretty respectable.''

But the trade association's recent survey of builders indicated considerable weakening in December.

``The mortgage rate is not the only factor'' in a family's decision to buy a house, he pointed out. ``Now consumer confidence is off, the stock market is a mess, and those things can have a big effect.''

Housing production is just 5 percent of the nation's economy. But weakness in housing ``pulls other parts of the economy with it, like the furniture and appliance markets,'' Seiders noted.

The banking industry already is feeling some pain, in part because of the weakening technology sector and volatile markets. Income from initial public offerings of stock and in-house investments is off. Several banks - notably Bank of America and First Union, both based in Charlotte, N.C. - have announced potential write-offs of nonperforming corporate loans. Other banks have had to raise reserves against possible defaults.

A recent report by Lehman Brothers brokerage said that of the 54 banks it tracks, 13 are expected to report earnings above analysts' expectations, 26 in line with expectations and 15 below target.

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-- Martin Thompson (mthom1927@aol.com), January 07, 2001