- The Washington Times - Monday, December 11, 2000

With new signs that the economy is weakening more than anyone expected, and with talk of recession in the air, Alan Greenspan's hint of interest-rate cuts and the promise of tax cuts under a Bush administration may have come in the nick of time.

Factory orders have fallen to their weakest level in three months, with big declines in transportation, electronics and other durable goods. The 3.3 percent drop in orders was bigger than analysts expected the biggest decline since the record 8.1 percent plunge in July.

Home-building has fallen off, retail sales are soft, and banks are tightening up on business loans to start-up companies. The battered technology sector has been hit especially hard, and new job growth has weakened a dangerous sign in a labor market that is as tight as it is.

Orders for transportation equipment fell 16.1 percent, mostly in aircraft. Outside of transportation, factory orders fell by 1.2 percent, the second decline in four months. Orders for electronic and electrical products, including household appliances, plummeted by nearly 10 percent.

The closely watched Federal Reserve survey of economic conditions reported last week there was a marked slowdown in eight districts around the country in November, and only moderate growth in four districts. The Fed reported weaknesses in auto sales, construction and manufacturing.

Banks, saddled with bad loans to struggling or bankrupt dot-com firms and other tech businesses, clamped down on their credit standards, cutting off badly needed capital the lifeblood of a thriving economy. New stock offerings from tech firms have all but disappeared. Investors are fleeing the technology sector for safe havens, thus weakening the driving force of the new economy.

The sharpness of these declines has surprised analysts, with many worrying we may not be in for as soft a landing as has been predicted. "Recession talk is in the air," reported the usually bullish Larry Kudlow, chief strategist at Wall Street's ING Barings LLC.

He wasn't the only bull turning gloomy. "The economy will finish the year 2000, not with a bang, but with a whimper," said Jerry Jasinowski, president of the National Association of Manufacturers.

"While it is far too premature to be using the 'R' word recession there's no question that the vibrant non-inflationary growth we've been enjoying for the past several years is cooling sharply in the fourth quarter," Mr. Jasinowski said last week.

All this was compounded by the continued economic weakness we have seen all year in the global economy. European economic growth continues to stagnate. Japan, the linchpin of the Pacific region, remains weak, hopelessly believing it can climb out of its economic morass by accelerating public works spending. It can't.

The troubling economic signs set off alarm bells at the Federal Reserve Board, followed by Mr. Greenspan's tardy admission last week that the U.S. economy has indeed slowed down "appreciably." That signaled that the Fed is no longer as concerned with inflation as it is with a weakening economy, and that it is ready to cut interest rates to keep it from tumbling further.

No one expects the Fed to cut rates when it meets Dec. 19 (the day after the Electoral College is scheduled to meet to elect the next president). But it is expected to signal its future intentions in a policy statement that acknowledges a deeper concern about the growing risks of a recession.

A Fed decision to delay cutting interest rates until sometime next year would not be good for the economy. It takes, at a minimum, six to nine months for interest-rate cuts to work their way through the economy too long to quickly reverse a slowdown whose descent may get steeper. It would be better to give the economy a booster shot now. Later, it will be harder, and will take longer, to overcome a deeper decline.

In the meantime, despite the worrisome signs of weakness, the U.S. economy is still being driven by several fundamentals that should keep investors bullish over the long term: low inflation, strong productivity, and a decade of record high-tech investment that has made U.S. businesses the most competitive in the world.

The most important thing is productivity, which remains very strong. The Labor Department reported last week that it rose by a hefty 3.3 percent annual rate in the third quarter, the third straight year of solid gains.

Increases in productivity mean businesses can produce more goods at lower unit costs. Thus, workers can be paid more without employers boosting prices, and that helps to keep inflation at bay while raising living standards.

There is nothing wrong with this economy at this juncture that can't be cured by lower interest rates and tax cuts to open up new capital investment for new business growth and increased job creation.

The best Christmas present the Fed can give the country is to begin phasing in rate cuts when it meets next week. That would give markets and investors the powerful boost in confidence that is desperately needed. Follow that up with George W. Bush's across-the-board tax cuts in early 2001, and this economy is going to come roaring back.

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