Even as the Federal Reserve Board moved to perk up the faltering U.S. economy with another interest-rate cut Wednesday, evidence of the nation’s deepening economic slowdown continued to mount.
Dragged down by the auto industry’s woes, the closely watched Chicago purchasing managers index–often considered a reliable bellwether for the manufacturing sector nationally–dropped to its lowest level in 18 years in January, as production activity in the Midwest continued to contract.
Separately, the Commerce Department reported that the nation’s gross domestic product, or GDP, grew at an annual rate of just 1.4 percent in the fourth quarter of 2000, the slowest rate since a 0.8 percent increase in the second quarter of 1995 and well below the modest 1.9 percent rate analysts had been forecasting. Growth is down from the 2.2 percent rate in third-quarter, and well below the superheated 8.3 percent expansion rate of fourth-quarter 1999.
The national GDP data underscore how “the downward economic momentum is gathering steam” noted Sung Won Sohn, chief economist at Minneapolis-based bank Wells Fargo & Co.
The Chicago index figures are “horrible, the worst numbers we’ve seen since 1982,” when the U.S. was deep in recession, said Brian Wesbury, chief economist at the Chicago-based investment bank Griffin, Kubik, Stephens & Thompson Inc.
Because the auto sector is so prominent in local manufacturing, he says, the Chicago survey “probably overstates the weakness of the national economy.” Nonetheless, Wesbury says, “I believe the U.S. economy is in recession today.”
The onset of full-blown economic recessions can’t typically be pinpointed until well after the fact, but Wesbury says he expects future data to confirm that the recession the Fed is now seeking to prevent actually started “in October or November, and will last through the third quarter.”
Every month, the National Association of Purchasing Managers surveys members nationwide about the level of economic activity, and the NAPM’s report is watched as a valuable leading indicator for the broad economy.
The NAPM’s Chicago branch, however, releases the results of its regional survey a day before the national group does. Because the Chicago results tend to correlate closely with those of the national group, economists and investors treat the Chicago survey as a good proxy for the national data.
On Wednesday, the Chicago survey fell a full five points, to 40.2 from 45.2 in November. Under the survey format, any index below 50 signals a contracting economy, while figures higher than 50 point to an economic expansion. The latest survey marked a fourth consecutive month in which what the Chicago group calls the “Business Barometer” has been negative.
New orders fell in the Chicago region, the survey found, while production tumbled and producers continued to work down the once-large order backlogs that built up in the prosperous times before late summer. That’s when the Fed’s earlier series of interest rate increases finally took hold and put the brakes on the nation’s economy.
Most likely, “a substantial portion” of the downward lurch in January’s Chicago index reflects the effect of temporary auto plant shutdowns, and the national report due Thursday will not be quite so downbeat, said Ian Shepherdson, an economist at High Frequency Economics Ltd., of Valhalla, N.Y.
Even so, the report is “very weak” and reinforces the extent of manufacturing problems, he said, adding that there “is nothing” in the survey “that could plausibly be called encouraging.”
For years, companies have been investing heavily in goods and equipment designed to make them more productive. But the latest GDP data show that in the fourth quarter, business investment declined for the first time since early 1992.
