America's shop-floor woes persist

An assembly-line slump is likely to lead the Fed to cut interest rates Wednesday for the sixth time this year.

In many ways, Bachman Machine Co. is typical of nuts-and-bolts America.

It's a family-run business that operates a shop floor the size of a football field, where machine tools stamp out everything from radiator caps to piano keys. This year, the third generation of Bachmans to run the business dreamed they would expand.

Instead the company, wedged between an interstate highway and the Mississippi River, is scrambling just to keep its assembly lines moving. Customers who used to pay their bills in 30 days are stretching them out to 60 days or more. So rather than building a new plant, Bachman cut capital spending in half.

Bachman's experience typifies why the Federal Reserve is likely to cut interest rates again this week, perhaps by another half percentage point. Despite five rate reductions already this year, the US economy - particularly the bellwether manufacturing sector - is stubbornly defying resuscitation.

Indeed, it now appears the economic malaise is starting to spread, spelling layoffs for college graduates as well as factory workers. Some economists don't see unemployment peaking until next spring.

"This is not a situation for complacency," says former Fed governor Lyle Gramley. "We're looking at numbers that are really grim."

If the Fed does opt for a half-point cut, rather than a quarter point, this would bring short-term interest rates to their lowest level since April 1994, when the nation was wracked with a savings-and-loan crisis.

Today, the prime cause for concern is a slumping manufacturing sector. As the National Association of Manufacturers notes, the companies that make everything from plastic molding to silicon wafers "are dead in the water."

A collapse in business spending is rippling through assembly lines from the New Jersey Turnpike to Silicon Valley.

Over the past nine months, the nation's manufacturers shed 540,000 jobs, many of them high-paying ones such as in automobile production. Only last week, DaimlerChrysler ended production of Jeep Cherokees in Toledo, Ohio - a move likely to affect hundreds of workers.

Trouble spreading

But the economic problems are now spreading beyond the shop floor. Retailers, brokerage houses, transportation companies, movie theaters, and newspapers are paring back employment. Last week, even an executive recruitment firm laid off 300 employees - a sign that CEOs are lying low for now.

"Corporate layoffs are accelerating," says Mark Zandi, an economist at Economics.com, a website. "Help-wanted advertising is plunging, and the number of people who are staying in the labor force is declining."

The jobless rate is likely to keep rising, peaking next spring at close to 5.5 percent, says David Wyss of Standard & Poor's in New York. Corporate headcount reductions announced earlier this year are now occurring.

One of the most unusual elements of the latest round of cutbacks, he finds, is the number of college graduates affected. "It seems to be hitting the high end instead of the low end."

The Fed is well aware of the problems. Two weeks ago, its "Beige Book" regional snapshots showed economic activity either unchanged or getting worse in April and May.

Then, last week, Fed Chairman Alan Greenspan testified before Congress that many companies that normally would have qualified for loans are now getting rejected. "Such policies are demonstrably not in the best interests of banks' shareholders or the economy," he said.

While banks may be tightening their standards, the Fed has been trying to anticipate potential problems, such as a credit crunch. This has led to six consecutive rate reductions of half a point. "The Fed wants to stay ahead of the curve," says Kevin Flanagan, an economist at Morgan Stanley Dean Witter.

So far, those efforts have had a limited effect on the economy. The housing industry is relatively healthy, with mortgages rates falling. The stock market has stopped skidding, even if it is lower than the beginning of the year. And, consumers have yet to pull back, despite black clouds on the horizon.

But a Goldman Sachs measure of financial conditions finds little improvement. "The stock market is saying they are not doing enough to get the job done," says Mr. Gramley.

That timely tax cut

In fact, economists are now hoping that the tax rebates, which will be mailed out next month, will revive the economy in the third quarter.

"Without that tax cut, the hopes for escaping a recession would be a lot dimmer than they are today," Gramley says. "This is one of the first times a fiscal policy change has been timely enough to do some real good."

If the tax cut does the job, that would sure help the Bachman Machine Co. So far, Bruce Bachman has seen little impact from the other Fed cuts. "We have not seen any kind of uptick in orders," he says.

Still, Mr. Bachman doesn't sneer at the prospect of another quarter-point rate cut, although it won't be a big improvement. "Put it this way: If I saw it on the street, I'd definitely stop and pick it up."

But he believes the Fed is being too conservative. He sees fear of the economic future in the eyes of vendors and customers and thinks only a half- or full-point cut will work. "You're almost going to have to heat up the economy past Mr. Greenspan's comfort zone before you start to allay some of those fears," he says.

(c) Copyright 2001. The Christian Science Monitor