- The Washington Times - Friday, January 5, 2001

It appears President-elect George W. Bush and Vice President-elect Dick Cheney haven't been "crying wolf" after all. In recent weeks, both men have been issuing warnings about a deteriorating economy. The White House has been responding with accusations that the incoming administration has been in the business of "talking down" the economy in an effort to shift the blame for any forthcoming recession to the outgoing administration. Federal Reserve Board Chairman Alan Greenspan and his colleagues on the committee responsible for monetary policy, who are in the business of knowing the difference between an imagined wolf at the door and an imminent recession, endorsed the Bush-Cheney view Wednesday afternoon. Indeed, the Fed took the unusual step of voting during a conference call Mr. Greenspan convened between formal meetings of the Fed's policy committee. The Fed reduced the so-called federal-funds rate, which is the interest rate banks charge each other for overnight loans, by a relatively hefty one-half percentage point, setting off an immediate rally in the stock market, which, to say the least, had been in the doldrums, if not in free fall, since March.

Considering the spate of negative economic developments that strongly suggested the economy was deteriorating much faster than the Fed had anticipated, Mr. Greenspan decided action could not wait until the Fed's next formal meeting at the end of January. As it was, last month the Fed cited "eroding consumer confidence [and] reports of substantial shortfalls in sales and earnings," among other factors, in its official assessment that the risk of recession now outweighed the threat of higher inflation.

Since then, the news has gotten even worse. The stock market, particularly the technology-heavy NASDAQ Composite Index, continued to fall, enhancing the negative "wealth effect" upon consumers. With their net worth steadily eroding in tandem with the stock market, consumers responded with lackluster purchases during the holiday season. Eerily replicating the steep drops in consumer confidence that preceded the 1980 and 1990-1991 recessions, a consumer-sentiment index published by the University of Michigan registered a double-digit decrease last month, falling to its lowest level in two years. Meanwhile, as businesses reported shortfalls in their sales and earnings in recent months, their investment in technology, which had been a major contributing factor to the economy's impressive growth in recent years, slowed significantly, further accelerating the NASDAQ's nosedive.

This week the bad news accelerated. On Tuesday, while the NASDAQ fell more than 7 percent, the National Association of Purchasing Management reported that its purchasing index, which measures activity in the manufacturing sector, plunged four points in December, falling to its lowest level since the end of the last recession. At its current level, the index presages annual economic growth of less than 1 percent. Indeed, throughout 2000 the purchasing index fell more steeply than any year since 1979. Wednesday morning the Big Three domestic automakers reported that their December sales had fallen off a cliff, declining between 15 and 18 percent compared to December 1999. On the same day, the Commerce Department reported that construction spending fell 6 percent in November.

With economic activity slowing dramatically during the latter part of the fourth quarter, inflationary pressures, which had significantly subsided during the two previous quarters, posed little threat at all. It was against this backdrop that the Fed properly acted to reduce short-term interest rates. Yet, the danger does not end there. Mr. Bush was surely right on Wednesday to press ahead with his tax-cut proposal, whose implementation is even more necessary today than it was last year, when, it's worth noting, it might have forestalled the economy's significant deterioration. Now that the economy has indisputably slowed, demolishing President Clinton's recent rosy depiction, it makes even less sense to permit extraordinarily tight fiscal policy to work at cross purposes with the Fed's loosening of monetary policy.


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