- The Washington Times - Wednesday, October 17, 2001

The Sept. 11 terrorist attacks cut short a budding recovery in American manufacturing and technology, sending production plummeting for the 12th straight month in the longest string of declines since World War II.
The renewed downfall of manufacturing seen in a report from the Federal Reserve yesterday means the economy is unlikely to escape recession, analysts say, and calls into question the usefulness of proposed tax breaks aimed at expanding production at a time when store shelves are brimming with unsold goods and businesses have reason only to cut back.
Alfred Broaddus, president of the Fed's Richmond reserve bank, was among the many who lamented the setback at the nation's industrial plants, utilities and mines, where production fell by 1 percent last month.
"On the eve of the crisis, the economy was clearly soft, but there were at least a few signs that the worst of the slowdown might be behind us and that the economy might be ready to reaccelerate," he said in an address to business leaders in North Carolina yesterday.
Now, the outlook for industrial activity and the economy has darkened because of the "significant blow" dealt by the attacks, he said.
Fed watchers said yesterday's report is particularly of concern to the central bank because it offers little hope of a quick recovery from the deep recession in manufacturing and the economy at large. They predicted more interest-rate cuts in coming weeks to cushion the economy from the worst of the downturn.
"I can assure you the Fed will continue to do everything we can do to foster a recovery," Mr. Broaddus said.
But he noted that even the Fed's aggressive rate cuts will take time to bring the economy back to health and it will take the reinforcement of further tax cuts and spending by Congress.
"I think we all recognize that lower interest rates alone can't meet all the economic challenges we face," he said.
But one hopeful sign that the rate cuts are starting to help is a splurge in auto sales in the past month inspired by zero interest rate loans being offered by dealers, he said.
Even as dealers unloaded cars in the showrooms, auto manufacturers slashed production by 3.6 percent, partly as a result of disruptions in supply shipments at the Canadian border due to heightened security in the wake of the attacks. Meanwhile, manufacturers of high-tech equipment such as computers and semiconductors cut production by another 2.4 percent.
"It was a complete and total rout," said Joel Naroff of Naroff Economic Advisers. He noted that the loss in production of 5.8 percent in the past year already has exceeded the 1990-91 recession.
With production schedules and manufacturing jobs being slashed everywhere job losses have totaled more than a million in the last year manufacturers are swimming in overcapacity. Meanwhile, retailers are overstocked and few businesses have any reason to add to spending, he said.
The only thing that will provoke a revival is a comeback by consumers, which remains in doubt, he said. Reports from retailers show that shopping has been spotty since the attacks, falling once again last week when consumers went home to watch the beginning of the Afghanistan bombing campaign on TV.
"Since I'm not a mass psychologist, I can't say if spending will jump anytime soon. But consumers hold the key," Mr. Naroff said. "It is doubtful that firms will ramp up production until they are certain that consumers are back."
The downward slide of manufacturing holds lessons for Congress, Mr. Naroff said, because it suggests that tax breaks aimed at spurring investment and production will have little effect as long as producers have significant excess capacity currently at nearly 25 percent. House Republicans have been pushing various investment incentives, from accelerated write-offs of equipment purchases to capital-gains-tax reductions.
David Huerther, chief economist with the National Association of Manufacturers, said the renewed slump in manufacturing confirms that the economy is in a recession.
"Today's report is a harbinger of things to come for the next several months," he said.
But he was hopeful that business spending on technology will pick up again next year as companies carry out lessons learned from the attacks and beef up their back-up information and teleconferencing systems.
He said the consumers and business tax cuts advocated by President Bush, which include tax rebates for low-income consumers and elimination of the corporate minimum tax, should stoke an industrial recovery at the beginning of next year. The president's proposals are more limited than those in the $100 billion bill approved by the House Ways and Means Committee Friday.
"What they did is more than we'd like, so we have some work to do," said Treasury Secretary Paul H. O'Neill, speaking to Federal Express employees in Memphis, Tenn., yesterday and suggesting that some House provisions are likely to be dropped as the bill winds its way through the Democrat-controlled Senate. "Part of what you saw last week was show business."

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