Looking for a soft landing

By by DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 2/1/2001

The Federal Reserve Board-personified by chairman Alan Greenspan-made a preemptive strike against a possible 2001 recession on the second business day of the new millennium by lowering short-term interest rates. In a move that caught even veteran Fed-watchers by surprise, the federal funds rate was lowered by one-half percentage point-the first decline in official interest rates in more than 2 years.

Greenspan and friends made the move because economic data released during the final quarter of 2000 showed that the danger of recession during 2001 far outweighed the risks of heightened inflation. Although hardly operating in a panic mode, the Fed saw an urgent need to take out an insurance policy against possible recession. It also sent an unmistakable signal that it was prepared to do anything necessary to ensure that the U.S. economy enjoys a soft landing during 2001.

The reassurances came none too early. Threatening storm clouds gathered over the economic landscape as we welcomed in the new year. A wobbly stock market, slower gains in employment and income, and a presidential election that went into triple-overtime combined to depress the spirits of American consumers during the final months of 2000.

The Conference Board's Consumer Confidence Index (CCI) fell by 3.2% between November and December of 2000. It declined a cumulative 7.3% over the previous 4 mo. And the National Association of Purchasing Management's (NAPM) "Report On Business" survey showed that economic activity in the nation's manufacturing sector declined for the fifth consecutive month during December. That followed 18 straight months of expansion.

The NAPM's Purchasing Managers' Index (PMI) was at a level of 43.7 during December 2000, 8.1 percentage points lower than in July. A PMI reading above 50 indicates that the manufacturing sector of the economy is expanding, while anything below 50 signals a downturn.

Although recent trends in the PMI are worrisome, the index remains somewhat above the 42.4 level that would indicate the overall economy (not just manufacturing) was in a period of contraction. Despite its weakness, the PMI isn't yet at the point which would signal even a possible recession in our future. Hopefully, the Fed did enough early enough to extend the nation's already record-long economic expansion during 2001.