FEDS Fight Off Recession

Tuesday, May 29th 2001, 12:00 am
By: News On 6

In an effort to ward off a recession, the Federal Reserve has slashed interest rates five times this year, lowering borrowing costs for millions of consumers and businesses to its lowest point in seven years.

The economy grew at an annual rate of just 1.3 percent in the first quarter, a big downward revision from the previous estimate of a 2 percent growth rate. The biggest factors weighing down growth: a steep drop in business investment and a huge reduction in business inventories, both of which reflect flagging demand.

Tuesday's report also showed that consumers' spending on nondurable goods, such as food and clothes, rose by 0.7 percent in April, compared with a 0.3 percent drop in March.

Spending on services rose by 0.5 percent in April, down from a 0.7 percent gain the month before. The services category includes such things as gas and electric utilities, doctors visits, bus and train fares and rent for housing.

But spending on durables _ costly manufactured goods expected to last at least three years, such as cars and washing machines _ fell by 0.6 percent in April, on top of a 0.7 percent decline in March. None of those spending figures are adjusted for inflation.

When adjusted for inflation, spending on durable goods fell by 0.4 percent, spending on nondurables rose 0.3 percent and spending on services edged up 0.2 percent in April, suggesting that higher prices account for a large chunk of the rise spending.

With spending outpacing income growth, the personal savings rate _ savings as a percentage of after-tax income _ dipped to a negative 0.7 percent in April, compared with a negative 0.6 percent in March.

The savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real estate values or from financial investments, economists say.

Rising layoffs, eroding consumer confidence and higher energy prices all are factors making consumers more cautious in their spending, economists say.

The nation's unemployment rate jumped to 4.5 percent in April, a 0.2 percentage point increase from March, and businesses slashed payrolls by the largest amount since the country was last in a recession a decade ago.

Many economists expect that when the government releases the employment report for May on Friday it will show that the jobless rate edged up to 4.6 percent.

Economists are concerned that if the employment picture worsens, consumers might sharply cut spending and tip the economy into a recession. But many continue to believe that the Fed's aggressive interest rate cuts and tax relief from Congress will permit the economy to skirt a recession this year.