Jobless rate soars interest rates cut June employment hits 7.8%, spurs fear of triple-dip recession

July 03, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- An unexpected surge in the unemployment rate provoked fears of a triple-dip recession and prompted the Federal Reserve to lower interest rates yesterday to their lowest level in more than two decades.

The Fed lowered the discount rate -- the interest it charges banks for loans -- to 3 percent from 3.5 percent, unleashing a flurry of downward adjustments on various consumer interest rates.

The move could spur new economic activity by luring credit-leery consumers back into the home, auto and retail markets, and open up more attractive lines of credit for businesses.

The Fed's action came as the government announced the unemployment rate jumped to 7.8 percent in June, its highest level in eight years.

"We have not seen anything that bad in a long while," said Paul W. Boltz, vice-president of T. Rowe Price in Baltimore. "What is scary about this is this is a very important number for households in making their own assessments about spending."

Lawrence A. Hunter, chief economist with the U.S. Chamber of Commerce, said simply: "What a bummer."

And Maryland Democratic Sen. Paul S. Sarbanes, chairman of the Joint Economic Committee, called the new jobless figures "an economic disaster for the nation."

Most stunning was the loss of 117,000 non-farming jobs in a month when many economists were expecting a gain of perhaps 100,000 or more jobs. It was the first decline in five months and flashed early warning signals about a possible return to recession.

"I am very concerned that the high priests of doom in the temple may be onto something," said Ed Yardeni, economist with C.J. Lawrence in New York.The Fed, which has been under increasing pressure to lower interest rates in recent weeks but has hesitated for fear of rekindling inflation, adjusted the discount rate promptly yesterday. It said it was acting "in the light of consistent weakness in credit and money growth, continued movement toward price stability, and the uneven progress of the economic recovery."

The central bank also moved to lower the federal funds rate -- the rate at which banks borrow from each other overnight -- to 3.25 percent from 3.75 percent.

President Bush, whose election prospects have been hurt by the weak economy and who urged the Fed to cut rates last week, welcomed the rate reduction, saying: "All I know is . . . this would be stimulative and would be very well received not just in the financial markets, but by business, and particularly small business, that'll have a better shot at creating something."

Mr. Bush called on Congress to pass his growth package, including a $5,000 tax credit for first-time homebuyers and a cut in capital gains taxes.

Democrats on Capitol Hill noted that the increased level of unemployment followed new announcements by major companies in the past week of further layoffs.

Congress rushed yesterday to pass legislation extending unemployment benefits for another 26 weeks, and the House Banking subcommittee on domestic monetary policy called a hearing for next week on the "politicization" of monetary policy to see if the Fed yielded to political pressure in an election year.

A number of major banks nationwide immediately followed the Fed's lead, lowering their prime rates to 6 percent from 6.5 percent.

Prices in the bond market, which overcame its previous fears of inflation and recognizing that the economy is again in trouble, rallied on the news, pushing both short- and long-term interest rates down. Three-month Treasury bills yielded 3.29 percent, the lowest level in 20 years, when the market closed. Yield on the Treasury's main 30-year bond was down from 7.74 percent to 7.63 percent, the lowest since January.

The value of the dollar fell, which should help exports by making U.S. goods cheaper overseas.

And the stock market, made jittery by the unemployment figures, retreated, leaving the Dow Jones industrial average off by 23.81 points at 3,330.29.

James Chessen, senior economist with the American Bankers Association, predicted an "across-the-board" cut in interest rates mortgages, business loans and credit cards.

Lyle Gramley, economist with the Mortgage Bankers Association America, said the average mortgage rate, not including closing costs, dropped to 8.1 percent from 8.3 percent yesterday.

He said he expected the adjustable mortgage rate to be around 5.20 percent, down from its recent average of 5.60 percent.

The Labor Department said the unemployment rate in June was 0.3 percentage points higher than in May, the second such surge in consecutive months and the severest recent jolt to the prospects of sustained recovery.

That leaves 10 million people out of work, 471,000 more than in May. Particularly worrisome were declines in manufacturing and construction, which typically lead the country out of recession.

The day's bad news was compounded by word from the Commerce Department that orders to U.S. factories fell 0.8 percent in May, the first decline in five months.

With yesterday's negative news likely to hold the overall economic growth rate for the second quarter well below the 2.7 percent annual growth rate of the first quarter, Diane Swonk, economist with First Chicago Corp, said: "It's like a relay race. Each quarter has to do its bit to hand off growth to the next quarter. If they don't make it, it's a very shaky recovery."

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