Signs of a slowing economy support action on interest rates

Journal Record, The (Oklahoma City), Sep 27, 1996 by John D. McClain Associated Press

WASHINGTON -- Fresh signs of a slowing economy emerged Thursday, supporting this week's Federal Reserve decision against raising interest rates to avoid a new round of inflation.

Government reports showed that orders for big-ticket durable goods in August suffered the biggest loss in 16 months, and new claims for unemployment benefits jumped last week to the highest level since mid-July.

"These numbers make Chairman Greenspan look pretty smart," said economist Maury Harris of Paine Webber Inc. in New York. "All the data is telling the same story: The economy is slowing down." Fed Chairman Alan Greenspan has held in recent weeks that inflationary pressures did not necessitate interest rate hikes. Thursday's news sent stocks and bonds higher on Wall Street, with the Dow Jones industrial average up 17.38 points at 5,894.74 at midday. Bonds prices rallied for a third straight session, sending the yield on the 30-year Treasury bond to 6.87 percent, down from late Wednesday's 6.92 and the lowest level in more than a month. After meeting secretly for almost five hours on Tuesday, Fed policy makers surprised many analysts and voted to hold interest rates steady, apparently convinced the economy was slowing on its own and not threatening renewed inflation. It was the Federal Open Market Committee's last meeting until Nov. 13, eight days after the presidential election. Some analysts believe officials will use that occasion to raise rates as insurance against an overheated economy. For instance, economist Richard Berner of the Mellon Bank in Pittsburgh said the current economic moderation was just a lull and predicted: "We will see somewhat stronger growth as we go into the fall." In one report, the Commerce Department said durable goods orders fell 3.1 percent, to a seasonally adjusted $167 million. It was the biggest drop since a 3.4 percent decline in April 1995. Analysts had expected only a slight 0.1 percent decrease. The report also showed orders in July were weaker than first thought, rising 1.4 percent rather than the earlier 1.7 percent estimate. Durable goods include items such as cars and computers expected to last more than three years. They are considered a key gauge of the nation's manufacturing sector, since declines could mean lower production and loss of jobs. All major categories shared in the loss, including transportation orders, which fell 7.9, steepest since 11.9 percent last April. Orders for aircraft and parts accounted for over half of the loss, although demand also weakened for motor vehicles and parts. Excluding transportation, orders fell 1.6 percent, largest since March. Orders for electronic and other electrical equipment decreased 5.6 percent, the first decline since May. Orders were down 2.7 percent for primary metals and 0.7 percent for industrial machinery and equipment. Orders for nonmilitary capital goods excluding aircraft fell 5 percent, erasing a 3.9 percent gain in July. These orders often are a barometer of business plans to expand and modernize. The volatile military category managed a 9 percent advance after falling 40.9 percent a month earlier. Excluding military, orders were off 3.5 percent. Unfilled orders slipped 0.3 percent. A shrinking backlog suggests businesses will find it unnecessary to increase production facilities and manpower to meet demand. Shipments, a measure of current activity, slowed to a 0.3 percent advance from 0.5 percent in July. In a separate report, the Labor Department said new applications for unemployment insurance jumped by 11,000 last week to 340,000, highest since 367,000 during the week ended July 13. "If a trend around ... 340,000 is sustained, the initial unemployment claims series would indicate significant moderation" in the economy, said economist Elliott Platt of Donaldson, Lufkin & Jenrette Securities Corp. The four-week moving average of new weekly jobless claims was up 2,500 to 328,750. It was the sixth straight advance and the highest level since July. Many analysts prefer to track the average because it smooths out the weekly volatility.