Economy predicted to continue weakening

By Michael Liedke, The Associated Press
Tuesday November 20, 2001

Feds see decline into first quarter of 2002 


SAN FRANCISCO — The sliding economy probably will continue its descent through the winter amid rising unemployment and falling property values, a top Federal Reserve Bank official said Monday. 

The economy’s output, or gross domestic product, will decline in final three months of this year and the first quarter of next year, predicted Robert Parry, president of the Federal Reserve Bank of San Francisco. The economy should start rebounding in the spring, Parry forecast, resulting in modest growth in the second quarter. 

Parry made his remarks after a speech at a real estate and economics meeting sponsored by the University of California at Berkeley. The presentation marked his first public remarks on the economy since the Sept. 11 terrorist attacks. 

“Frankly, over the short term, the outlook isn’t great and there’s a lot of uncertainty,” Parry said in his speech. He said steep slump in the technology industry makes it highly unlikely California — and the Bay Area in particular— will recover anytime soon. 

California is the largest part of Parry’s Fed district, which spans nine Western states. 

Over the long term, though, “our economy remains fundamentally strong and it still affords tremendous opportunity,” Parry said. 

During question-and-answer sessions with the audience and the media, Parry predicted consumers will curtail their spending and save more money during the next few months as businesses continue to fire workers to shore up their sagging profits. The commercial real estate industry, in particular, will “face quite a bit of challenge” as office vacancy rates rise and rents decline, Parry said. 

To combat the weakness, the Fed may lower interest rates even further, Parry said. The Fed has lowered interest rates 10 times since the beginning of the year, decreasing its benchmark federal funds rates from 6.5 percent to 2 percent — the lowest level in 40 years. 

“If it were necessary — and I am not making an interest rate forecast — there is sufficient room” to lower rates below 2 percent, Parry told Monday’s audience. 

Parry participates in the meetings of the Federal Open Market Committee that sets interest rates, but doesn’t vote on the group’s decisions. Under the Fed’s system for rotating power around the country, Parry won’t vote on the direction of interest rates until 2003. 

Although some economists have questioned whether interest rate cuts will provide the financial tonic the country needs, Parry believes this year’s flurry of reductions “will go down in the history books as effective.” He said a sharp drop in mortgage rates already have spurred a refinancing boom that has boosted household incomes and fueled consumer spending. 

The refinancing gains, though, won’t be enough to reassure increasingly uneasy consumers about the wave of layoffs since the Sept. 11 attacks, Parry said. The country lost 415,000 non-farm jobs in October — the largest one-month setback in 21 years. 

“I would be very surprised if we don’t see some pickup in the savings rates because people are feeling uncertain,” Parry told reporters. Parry called relatively strong consumer spending “the most surprising element of the past year.” 

Consumers opened their pocketbooks last month to boost retail sales by 7 percent, but most of that stemmed from a spike in new auto sales triggered by offers of zero percent financing. Parry predicted that the sales incentives will hurt auto sales next year by significantly reducing the number of consumers looking to buy a new car. 

With the economy weakening around the world, Parry believes oil and gas prices will remain stable or decline even further in the months ahead — another development that should help both consumers and businesses. 

“It’s hard for me to believe that there will be a strong, sustainable upward trend in energy prices in the near future,” Parry said.