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Mixed Signals.

CAN THE FED'S LATEST LOWering of interest rates by a quarter percentage point stave off a national recession?

While everyone is hoping so, a lot of economists have their doubts.

Right now, the American economy has stalled. That's a fact. And for some sectors, it's already in a big-time recession.

Arkansas felt its ill effects with recent announcements of large layoffs from Acxiom Corp., Eastman Corp. and International Paper Co. And these were just the latest to announce cutbacks.

Some economists now believe a recession is inevitable or already under way, regardless of the Fed's action on short-term interest rates, now at 3.75 percent.

Since the American economy sets the tone for rest of the world, it puts a lot of pressure for Alan Greenspan & Co. to get it right. The Fed board's opting for a quarter point cut rather than a half point implies that there are signs of recovery on the horizon, but, as a hedge, the board simply left a little room for a future cut, if needed.

Indeed, several recent economic reports show signs of a strengthening economy.

* Consumer confidence rose for the second consecutive month in June.

* Orders to U.S. factories for high-priced manufactured goods were up 2.9 percent in May after a 5.5 percent drop in April.

* New-home sales rose 0.8 percent in May, following a revised 4.5 percent decline the month before.

No one foresees the type of growth experienced in the past few years, but most do predict the economy will continue to expand slowly.

* So what's up? The Fed is having to contend with a economy that has a split personality.

Job losses have been mounting in the factory sector, and production has fallen for eight months, making it the worst period in nearly 20 years. And the situation is even worse in the high-tech sectors that spurred much of the growth of the late 1990s. Business investment continues to fall.

On the flip side, however, the Fed has to consider the consumer, who's still spending freely on houses and cars and just about anything else. The coming tax rebates and declining energy prices will only add to the spending.

So while the economy is down with weak corporate earnings, large layoffs, slumping financial markets and anemic growth, it definitely isn't out. So far, only the manufacturing sector has been hit hard. Employment and real retail sales haven't fallen significantly -- yet.

Many economists doubt whether the rate cuts will help right now because the main problem is weak capital spending. Consumers seem to be doing their part of spending, but businesses are more careful about spending. Many companies won't be buying until the earnings forecast improves. Period.

A lot is riding on the Fed's action to reverse the downturn and moderate its effects, before it turns into a full-scale recession.

Let's hope Greenspan & Co.'s latest move is the correct one.
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Title Annotation:Arkansas job market
Publication:Arkansas Business
Article Type:Brief Article
Geographic Code:1USA
Date:Jul 2, 2001
Previous Article:Expensive Crash.
Next Article:LETTER.

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