As Manufacturing Contracts, Chances For Interest-Rate Cut Rise

Jan. 13, 2005
By John S. McClenahen Even Federal Open Market Committee Chairman Alan Greenspan may not yet have made a final decision on whether to cut U.S. short-term interest rates when he and his colleagues meet in Washington, D.C. on Nov. 6. But it now seems ...
ByJohn S. McClenahen Even Federal Open Market Committee Chairman Alan Greenspan may not yet have made a final decision on whether to cut U.S. short-term interest rates when he and his colleagues meet in Washington, D.C. on Nov. 6. But it now seems likely that the committee, perhaps in a less than unanimous vote, will lower the influential federal funds rate 25 basis points to 1.5% to coax more growth from a slowing U.S. economy. On Nov. 1 the U.S. Labor Department reported that the overall U.S. unemployment rate rose one-tenth of a percentage point to 5.7% in October while the economy shed 5,000 jobs, a relatively small number. "Overall, labor market conditions were little changed in October," said Kathleen P. Utgoff, commissioner of the Bureau of Labor Statistics, the Labor Department unit that pulls together the relevant data. She's correct -- in the broadest sense. But there were some economically disturbing numbers in the details. For example, 49,000 U.S. factory workers lost their jobs last month, with most of the layoffs coming in the electronic and electrical equipment, primary metal, fabricated metals, and aircraft industries. Manufacturing job losses have been averaging 47,000 a month since July, more than double the 20,000-per-month average for April through June of this year. In the electronics industry alone, employment has fallen by 44,000 in just the past three months. What these data suggest and what an Institute for Supply Management index confirmed on Friday is that U.S. manufacturing is again contracting. ISM's closely watched PMI manufacturing index fell to 48.5% in October, down a full percentage point from September's 49.5%. An index figure below 50% indicates that manufacturing generally is contracting; above 50% it signals that manufacturing is expanding. "Manufacturing lacks drivers at this point," observes Norbert J. Ore, chairperson of ISM's manufacturing business survey committee and group director for strategic sourcing and procurement at Georgia-Pacific Corp. "While new orders are relatively unchanged, the uncertainty with regard to terrorism and potential military action continue to add to the stagnation. Capital spending for additional capacity and IT is very soft." Last Friday's unemployment data alone should be enough to trigger a cut in interest rates, says Jerry J. Jasinowski, president of the Washington, D.C.-based National Association of Manufacturers. He's urging the FOMC to lower the federal funds rate by 50 basis points to 1.25% at Wednesday's meeting. "Also the time has come for the Department of the Treasury to recognize that we have a serious credit crunch at work discouraging vital investment," says Jasinowski. "Lower rates do little good if the banks refuse to lend," he states, adding that "we will never see a solid recovery until this bottleneck in our financial system is eliminated."

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