Industrial output falls Fed urged to cut rates Fear grows that recession is back

December 17, 1991|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau of The Sun

WASHINGTON -- A gloomy drop in industrial output fired demands yesterday for a quick cut in interest rates by the Federal Reserve and fueled fears among some economists that the nation was heading back into deep recession.

Output declined 0.4 percent last month, reflecting the flat state of the economy in general and reluctance of consumers to buy new autos in particular, the Fed reported. The lack of car buyers left the industry with surplus inventory, which forced lower production.

Economists differed over whether the latest negative indicator foreshadowed re-entry into recession, but all agreed it reflected the enduring economic anemia that is preventing recovery.

Murray Weidenbaum, President Reagan's chief economic adviser in the early 1980s, said his first reaction to the "very substantial drop" in output was: "Ouch."

He said the Federal Reserve should not wait for more bad news before cutting half a percentage point off the discount rate, which is already at an 18-year low of 4.5 percent after five cuts in the past year. He added: "If they were smart, they would get ahead of the game.

"Anything less than half [a point] would be dissipating their ammunition, so to speak. A full percentage point would get everyone's attention, but then, of course, in the convoluted financial market we live with in the U.S., people would start wondering, 'Is this situation worse than we think because the Fed has acted so decisively?' "

Mr. Weidenbaum, who is director of the Center for the Study of American Business at Washington University in St. Louis, said: "I am not goingto forecast a renewed declining trend because of one month, but it sure confirms my feeling that we are rocking along the bottom and the upturn is delayed until next year."

To William Spriggs, economist with the independent Washington-based Economic Policy Institute, the output decline was "another indicator that we probably will have a double-dip" recession. He suggested further bad news could persuade the Federal Reserve to lower interest rates again next month.

An economist with the congressional Joint Economic Committee, who asked not to be identified, shared the "double-dip" analysis and said he expected the Fed to wait for the December unemployment figures before reacting.

"Hell, yes, it increases the pressure," he said of the drop in output. "Everybody's leaning heavily on the Fed. The [Bush] administration is probably communicating their desire for lower interest rates as frequently as they can.

"It's a question of where do you think the risks predominate. Is it more risky to cut the rate more, or more risky to do nothing? It strikes me it is more risky to do nothing."

A more optimistic view of the output figures came from Gordon Richards, economist with the National Association of Manufacturers. He noted that the decline was worsened by a strike at a major mine equipment plant and the excess auto inventory that was being worked down.

William F. Treacy, chief economist with MNC Financial Inc., the Baltimore holding company that owns Maryland National Bank and American Security Bank, said, "It's not good to see a decline."

He noted the output decline accompanied sluggish retail sales leading up to Christmas and "just awful" demand for credit. "I think we were expecting something a little more along the lines of a classic recovery," he said. "What is seriously holding us up is that consumers have been really hesitant. They have imposed a self-discipline on themselves, which makes some sense."

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