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FEDERAL HOME LOAN BANK OF NEW YORK SEES SURPRISING SETBACK FOR THE ECONOMY WITH WEAKNESS LASTING A WHILE

 FEDERAL HOME LOAN BANK OF NEW YORK SEES SURPRISING SETBACK FOR
 THE ECONOMY WITH WEAKNESS LASTING A WHILE
 NEW YORK, July 3 /PRNewswire/ -- Eugene J. Sherman, chief economist of the Federal Home Loan Bank of New York (NYSE: FRE), finds that the economy suffered a surprising setback as demonstrated by the employment data for June. Total payroll employment and virtually all categories declined. So did hours worked. So did total civilian employment (household survey) for the second consecutive month.
 There had been intimations of developing weakness for several weeks, In fact, with the benefit of hindsight, it now appears that economic growth has been decelerating since February, but certainly at a quickened pace in June.
 Unfortunately, this is reminiscent of the late summer-fall period of 1991 when the recovery that began in the spring simply petered out. At that time consumer confidence deteriorated sharply, apparently as a result of an accumulation of announced layoffs and job eliminations. That lose of confidence had sharp echo effects, especially in purchases by consumers of big ticket items. Confidence began to recover in the first quarter but still remains "below par." Moreover, confidence stopped improving in June.
 Now there are grounds for further pessimism. Just in the past week there were a number of announced job layoffs and eliminations. Among them, Hughes Aircraft (9,000 workers, over 18 months), Aetna Life (4,800 workers, over the next year or so), Alcoa (2,100), Northwest Airlines (250) and Pratt & Whitney (128). In additions a widely respected consultant reported that the oil industry would lose another 50,000 jobs, or 14 percent of its workforce, over the course of 1992. These layoffs, and perhaps others, will have a powerful debilitating impact on consumer confidence, not only on the workers themselves, but on their families, their neighbors and their communities. Political uncertainties may also add to the collective discomfort. So, we may be in for another couple of months of consumer spending restraint.
 The Federal Reserve was apparently as surprised by all of this as everyone else. It did what it had to do, promptly lowering the discount rate and the Federal funds rate by 50 basis points. Interest rates in general followed to lower levels. But the yield curve actually steepened at maturities from three years and longer, with mare of the steepening taking place at longer maturities. Generally speaking, lower interest rates should be helpful in setting the stage for renewed spending. But this easing action is not as likely to be as effective as earlier ones. After all, about term rates were already at 20-year lows and the affordability index for housing purchases was quite high. Well, rates are now lower and affordability is higher. But it may take a couple of months for the public to respond. This is a different economic pattern than we have seen in past cycles; there are no comparable prior experiences on which to draw for guidance.
 Nevertheless, we can express confidence on a couple of issues. One, inflation will abate further. With demand slack there simply will be no market validation for progressively higher wages or prices. Furthermore, money supply has been so weak lately -- measured in months -- that there can be no monetary validation of higher prices. Two, intermediate and long term interest rates are likely to decline further owing to abating inflation, a lowering of inflation expectations, slack credit demand, accumulating liquidity in the system as the private sectors pay down debt and portfolio extension as investors reach out along the maturity spectrum to capture yield.
 The Federal Home Loan Bank of New York provides low-cost financing and other banking services to stockholding institutions in support of affordable housing for Americans in New York, New Jersey, Puerto Rico and the U.S. Virgin Islands.
 -0- 07/03/92
 /CONTACT: Eugene J. Sherman of Federal Home Loan Bank of New York, 212-912-4605/
 (FRE) CO: The Federal Home Loan Bank of New York ST: New York IN: FIN SU:


JP -- NY012 -- 6452 07/03/92 15:10 EDT
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Publication:PR Newswire
Date:Jul 3, 1992
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