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| ECONOMIC INJECTION | |
 June 27, 2001  |
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Analysis of Federal Reserve Chairman Alan Greenspan's decision to cut U.S. interest rates.
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GWEN IFILL: For more on the Fed and the economy, we're joined by Lakshman Achuthan, managing director of the Economic Cycle Research Institute, an organization that studies business cycles. James Bell, professor of economics at Harris-Stowe State College in St. Louis. And Greg Jones, director of research at Briefing.com, an online research and analysis firm. Greg Jones, what will today's cut accomplish I guess that's the question we all want to know? |
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GREG JONES: Not a whole lot really. There is a only a quarter point
within the scope of a largest cut that totals two and three quarters
GWEN IFILL: Professor Bell, do you agree it's not that big a deal? JAMES BELL: Well, I agree that it's probably not that big a deal, but of course in hindsight we'll have a better feel for the, what should I say, the degree of its importance. One thing that I would add to that, though, noting the tremendous slow down in the American economy from the, what, latter part of last year till about now, we knew that something had to be done coming from what, roughly 5, 5 and a ½ percent growth to now roughly, what, 1 percent or less, depending on who you talk with. And when I say something had to be done, it meant that something had to be done basically with regard to monetary policy. Of course, this is where the Fed comes in and, of course, if you take that and couple it with the incident or coincidence, you might say, of the fiscal stimulant that we hope will be provided by the rebate and tax cut, then there is perhaps reason for optimism. GWEN IFILL: Mr. Achuthan, if something had to be done, was what happened today enough that quarter point cut instead of the half point cut some people were agitating for? LAKSHMAN ACHUTHAN: Well, I would agree with the other GWEN IFILL: Well, if we are it indeed in a recession, which is, of course, what Alan Greenspan has been working so hard to avoid, why haven't these previous six, now today the seventh rate cut, why hasn't that been the jumpstart we were promised? LAKSHMAN ACHUTHAN: Well, a couple of reasons. One is that it takes, monetary policy moves take about a year. There's no set amount of time but it takes some time to affect the real economy, and the other, I think Mr. Jones alluded to, was that this -- the story behind this cycle is a bit different than the story that we have seen in many of the postwar business cycles and we have this, because we have this massive overcapacity, there's a lot of capital investment that was done in excess. And that is not something that is corrected. Those excesses aren't corrected by simply lowering rates. You actually have to have demand come back up and profitability appear in front of you before that will stimulate businesses to be more optimistic about the future. GWEN IFILL: Let's talk about that, Mr. Jones. As part of the Fed's statement today among the many reasons they gave for continuing these rate cuts was that there were signs of declining profitability and business capital spending, which Mr. Achuthan just referred to you. Do you agree with that and is that as big a problem that rate cuts won't solve? GREG JONES: Absolutely. It's not they can't solve it; it just takes a lot more time than usual. The typical business cycle we will see consumers react first and then businesses react to the slowdown in consumer spending. This time it has been the opposite really. We have seen businesses react and that they've realized they have had this excess capacity, which we've discussed. And now consumers are starting to react because of the layoffs on the corporate side. So it will take longer this time I think for the interest rates cuts to take affect because normally you're just trying to get consumers to spend again and then businesses will reduce inventories and start spending themselves. This time businesses, in some cases, have tremendous excess capacity and even if an interest rate can produce slight increase in demand, it's probably not going to be enough for quite some time; I think several quarters before it gets business to start investing again. |
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| On the brink of recession? | ||||||||||||||||||||
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GWEN IFILL: Do you agree with Mr. Achuthan's flat-out statement that we're in a recession? GREG JONES: I do. I think it's probably a close call, but if you look at what's happened on the jobs front, we're seeing declining jobs now and also in the industrial production indicators which have been down I think about seven months now, I think it's a pretty good bet we're in recession right now. GWEN IFILL: Professor Bell, how about that, are we in recession right now?
But as we look at the consumer we are beginning to become concerned as someone, one of the other guests pointed out, because of the layoffs and the things that are associated with that. Now, if we were to have a strong reduction in purchases on the part of consumer, both durable and non-durable, that could lead us into a much more profound downturn than we find ourselves in presently. GWEN IFILL: Professor Bell, why are these consumers still so optimistic? Why are they keeping us out of this recession? We see that they're still buying new and existing homes; we see they're still buying big ticket items, that they are pretty much optimistic, except for the ones, of course, who are getting laid off. What do you attribute that to? JAMES BELL: Well, I think there are probably a number of reasons. For one thing, if we look at the housing sector. If you think about it, now, historically you could argue that interest rates are still comparatively low, though they have not come down as much in the housing sector as you might have thought from the way the Federal Reserve has been cutting. I think they are higher now than they were last year. However, I think that the recent what should I say, income effect is probably still not completely exhausted. And you still have people having done quite well recently, still either doing well or they are optimistic to the extent that they think the credit cards will be payable at the time that they're due. So we're not certain at all this is coming from present income; some of it might be coming from credit that the consuming public still has or feels it has. GWEN IFILL: Mr. Achuthan, Mr. Greenspan has taken the optimist's role in this; he says we're just in a pause, in a lull. Do you agree with him on this? LAKSHMAN ACHUTHAN: No. I think I'm comfortable with the flat-out statement that the economy is in recession, and the reason I'm comfortable with that statement is because around these cyclical turning points, when this big expansion that we have had in the 1990s comes to an end and goes into a contraction for a period of time, around those times you can expect very classic movements in cyclical indicators. These are very broad measures of the economy right outside your window. And to see them move in such a classic sequence makes it's very convincing that we are in a recession. And I would expect one of the characteristics of a recession that these co-movements of the broad measures persist. It has to go on for a couple of quarters and they tend to feed on one another. And I think that's what you'll see happening now. So the job environment will probably continue to deteriorate, and that's ultimately where consumer confidence has its foundation - in the job market. GWEN IFILL: How about... excuse me. How about inflation? Is that a concern? LAKSHMAN ACHUTHAN: No, again flat out no, because the leading indicators of inflation are plunging. Recession kills inflation. And this is also not happening in a bubble. The U.S. economy I believe is in recession. So is the Japanese economy. The German economy is now on the brink of possibly going into recession. There is talk of second quarter GDP there will be actually negative. If you have the three major economies of the world contracting and they affect their neighbors, that has not happened since 1974. That's the last time you had a global recession. You don't have a locomotive of demand abroad to help you along and I think that's why when the dust settles and we look back that this, we'll have had a recession. |
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| Monetary policy driving economy | ||||||||||||||||||||
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GWEN IFILL: Mr. Jones, if that's true, that what's happening worldwide is affecting our economy and what's happening with the over investment in the tech sector is affecting our economy, all of these issues, can monetary policy drive the economy anymore? GREG JONES: Monetary policy can always drive the economy, pretty much.
I mean, banks are relatively healthy so they will lend if there is demand
out there. I think it's just going to take a while for the demand for
credit to pick up, given the issues we have discussed with over investment.
And demand will be slower in picking up because of the some of the issues
mentioned with global downturn in the economy. So it will take more time than normal, perhaps, for monetary policy to have an impact but it will have an impact and the Fed can continue to cut rates. They're at 3.75 percent after today's move, so there's still plenty of ability to cut rates further if that's what it takes to get the economy going, and also as we mentioned earlier, the fiscal policy effect with the tax cuts kicking in. So monetary policy has some help on this occasion. GWEN IFILL: Spend tax rebates, right? GREG JONES: Hopefully. GWEN IFILL: Professor Bell, given that, what other problems might exist throughout which are not easily visible and when can we expect to see some sort of long-term impact from these rate cuts? JAMES BELL: Well, once again, I think one of the previous speakers indicated that the time period was once again as we know them to be, is somewhere between nine months, let's say and a year or so, before we actually see the results or the impact you might say of these cuts. Now, you asked if there was anything else out there that was of concern. And one thing that I would like to raise, and of course get the opinion of the other....
JAMES BELL: I'll just say that the financial assets that are controlled by the two sources that the Fed has the most control over and that of course being the commercial banks and the thrifts, has the amount of assets that they control has been declining since 1980 and declining quite substantially. GWEN IFILL: Yeah. Well, we're going to have to leave that as your final point. Thank you, gentlemen, for joining me. |
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percentage points. So I think the bigger picture is more important,
which is that they have cut two and three quarters points since the
beginning of the year. And with those cuts we can expect some help for
the economy, but unfortunately probably not as much as we could have
expected in other business cycles because of the specific nature of
this business cycle.
guests.
It doesn't really matter how much they did today. The important thing,
the important issue is that the economy is very likely in recession
right now. And that is why we have been witnessing a very aggressive
Fed this year, trying to mitigate the downturn, make it as soft as possible,
I mean, to avoid it being much worse. So the most important thing is
the direction and I would expect that we would continue to see this
type of policy until the leading indicators point to recovery ahead.
And that's not clearly the case today. 
JAMES
BELL: Well, I think as one of the other guests pointed out it's definitely
a close call. We are either there or we are on the brink. Either way
it's reason for a concern. And one of the things that was pointed out
also of course is that the consumer probably has kept us out to the
degree that we might be out of a recession just now. 
First,
leading indicators turn down in a pronounced, pervasive and persistent
manner. They did that last fall and they essentially passed the point
of no return early this spring. And then subsequently you would see
the coincident indicators turn in unison just right after the leading
indicators. And that is essentially what we see happening now with things
like industrial production -- employment and manufacturing and trade
sales. 
GWEN
IFILL: We may not have time to go for too long but just very quickly.