Masonry Magazine December 1989 Page. 49
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Interest rates are slowly being lowered to help a softening economy. The money-controlling Federal Reserve is moving steadily to loosen credit, resuming a policy suspended for three months when summer business was brisk. The monetary authorities want to insure that the economy's growth continues. Absent credit stimulus, business activity could weaken to unsettling levels. A recession some time in 1990 couldn't be ruled out in such an environment. Still, Fed policy-makers will be easing carefully, cautiously and gradually. They are afraid of touching off a reacceleration in the rate of inflation.
The mood at the Fed now stands in sharp contrast to that of a year ago. Then, the central bankers were concerned about an overly exuberant economy-one that threatened to reverse much of the progress made in curbing inflation. Officials were in the process of tightening policy and did so into early 1989. Overall, interest rates moved up by three percentage points. But the Fed shifted gears back in June as signs of softening appeared. Since then, interest rates have declined by about a full percentage point, despite the pause during the summer when the economy showed some hints of renewed strengthening.
There are reasons to think that the easing process will last awhile. The economy will probably require mild and continuing support into 1990. Business activity in the current quarter is showing somewhat more weakness. The September/October jobs data have unmasked a slipping industrial sector, though overall employment rose an average of 220,000 in the past two months. (But that's down from the monthly average of 1989's first half of 250,000.)
Pronounced weakness has emerged all across manufacturing. Jobs fell 101,000 in this area in September and October; 16 of 20 groups showed drops. So it wasn't surprising to see that industrial production actually declined slightly.
There are also other reasons for seeing less-than-tolerable growth. The rise in exports is starting to stall, in response to the higher dollar. Retail sales are increasing moderately, lacking the vigor of recent years; the data seem to suggest that only small consumer-spending gains lie ahead. Sales of U.S.-made cars likely won't go much above a 6-million-a-year rate; that would be a million less than the rate for 1989's first three quarters.
Large incentives on 1989 models produced a surge in buying during the summer months. But much of these sales were no doubt borrowed from deliveries of the new 1990 model cars.
The weakness foreshadows new deterioration in the economy's growth. Gains in real Gross National Product-total output of goods and services-have become steadily smaller in the perspective of the last three years... from the 54% of 1987, to the 4% for 1988, and to 24% in 1989's first half. Most key sectors have slowed. In addition to the lagging exports, and the softening in buying of consumer durables, housing starts are down by 25%, commercial construction is off, and defense spending has passed its peak.
There is no strong case to be made for a resurgence in any of these areas this late in the aging business expansion.
The latest figures show how far the softening process has now carried. New orders for durable goods have stayed flat during the course of the year; in contrast to the 15% gains of 1988, they are up by only 2% so far in 1989. What is more, order backlogs have been declining steadily since last winter. And, after slipping last year, inventory-to-sales ratios have flattened out; the trend could be foreshadowing at least a modest problem with inventories. So the economy's growth may slow down in the current quarter if left unaided, to a rate of 14% or less. And further weakening is expected early in 1990.
Lower interest rates would bolster business activity, keeping it closer to, say, 2%, while avoiding the possibility that real economic growth may slide down toward zero-or even go minus.
But the Fed has to be cautious and careful in cutting interest rates. The agency is still concerned about inflation and intends to bring it down. Officials put the underlying rate at about 4%% this year and maybe in 1990. That is still a long way from the true price stability the Fed is seeking. But the inflation rate is not accelerating. And wages have remained stable. This fact has been a major surprise to Fed officials during this expansion. Despite the tautness in labor markets and high operating rates of industry, there's little evidence that workers are getting substantially greater pay.
So prices are not rising at a clip that bars further declines in rates. Coming interest-rate drops, though, are likely to be moderate and gradual. The banks' prime lending rate will fall slowly to, say, 9%% by mid-1990. Rates on home mortgage will decline as well... to perhaps 9% to 94% sometime in 1990.
Falling interest rates would also help lower the value of the dollar, now that the spread between rates here and those overseas has been narrowed. (Both West Germany and Japan have recently increased their interest rates.) Lower rates make investment here less attractive and cut demand for dollars. A lower dollar would strengthen the competitiveness of many U.S. producers. Their products would be less expensive in foreign mar-