Central Bank's Moves to Spur Demand Seek to Counter Slack in Economy, DeflationArticle
MARCH 20, 2009
By JON HILSENRATH - jon.hilsenrath@wsj.com
The Federal Reserve's decision this week to pump an extra $1.15 trillion into the financial system was driven in part by a worry that the U.S. economy has become plagued by increasing slack in the economic chain.
From empty hotel rooms to idle factory equipment to workers in part-time jobs, the economy is stuck with excess capacity.
This signals that even if the economy turns around tomorrow -- and there have been glimmers of stability in recent weeks, including higher stock prices -- the economy is likely to be operating well below its potential for many months, if not years, to come.
Fed officials worry about slack for another reason. When the economy has little of it, inflation becomes a problem because tight supplies allow businesses and workers to demand more money for their services. When there is too much slack, as now, inflation falls.
If the excess capacity becomes deep enough, or persists long enough, it could lead to outright declines in prices known as deflation, something Fed officials want to -- and believe they can -- avoid because it is difficult to unwind.
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued," the central bank's policy-making committee said Wednesday, when it announced it planned to pump additional money into the economy through purchases of government and mortgage securities.
Signs of slack are everywhere. The number of vacant homes dotting American neighborhoods was 19 million in the fourth quarter of 2008, up more than three million over three years. Hotel occupancy rates have fallen from 65.5% a year ago to 55.2% in early March, according to Smith Travel Research, a Tennessee firm that tracks the industry. Manufacturing plants ran in February at 67.4% of their capacity, the lowest utilization rate since the Fed began keeping records in 1948.
In normal times, the Fed would fight slack by reducing short-term interest rates to cut household and business borrowing costs. But the Fed has already cut its target rate -- the federal-funds rate -- to near zero.
That is why it announced Wednesday that it would ramp up purchases of mortgage-backed securities and long-term U.S. Treasury notes. By purchasing those securities, the central bank hopes to bring down borrowing on a broader array of bonds and loans to spur demand.
One example of the slack comes from Union Pacific Railroad, the nation's largest railroad. It has the capacity to run 200,000 carloads weekly, but is running only 150,000.
"As volumes remain soft, we are acting aggressively to right-size our resources, furloughing 3,600 employees, storing over 1,400 locomotives, and parking 53,000 freight cars," Rob Knight, the firm's chief financial officer, told investors in a conference call last week.
The clearest signs of slack are in the job market. On Thursday, the Labor Department reported that
new claims for unemployment benefits slid last week by a seasonally adjusted 12,000 to 646,000,
but the four-week average rose slightly to 654,750, a 26-year high. The total number of Americans
drawing weekly benefits jumped to nearly 5.5 million, a new high.
In all, the number of unemployed Americans has soared to a seasonally adjusted 12.5 million in the past 12 months, pushing the unemployment rate to 8.1%. An additional 8.6 million are working part time but would prefer to have full-time work. When accounting for these workers as well as those who wanted a job but hadn't looked lately, the "underemployment" rate -- a broader measure of job-market slack -- is 14.8%.
That doesn't hurt just the unemployed. It also hurts people who have jobs because it puts downward pressure on wages.
Irex Corp., a Lancaster, Pa., construction-services firm, has laid off about 1,000 workers in the past year, bringing its head count to roughly 1,500. The firm provides construction workers to manufacturers, hospitals, refineries and other companies building large new facilities.
Less than two years ago, Kirk Liddell, Idex's chief executive, had to subcontract work to competitors for some big projects because his company had a hard time finding qualified workers. Now, said Mr. Liddell, "if we put out a call for quality workers, we'd have thousands almost anywhere in the country."
One of the big surprises about this downturn, he said, is its breadth. He had expected work building hospitals to remain steady even as the manufacturing sector is crunched. But hospital work has been squeezed, as has education. The firm just lost a contract for a facility at Harvard University, which has been hit by losses in its endowment.
For U.S. officials, the key to unwinding the slack is boosting demand for goods, services, homes and labor. That is why the Fed is trying to bring down interest rates, and why some economists think Congress will need to pass a second economic-stimulus bill. President Barack Obama's $787 billion stimulus package, passed in February, is meant to aid the economy through spending programs and middle-class tax cuts.
MARCH 20, 2009
By JON HILSENRATH - jon.hilsenrath@wsj.com
The Federal Reserve's decision this week to pump an extra $1.15 trillion into the financial system was driven in part by a worry that the U.S. economy has become plagued by increasing slack in the economic chain.
From empty hotel rooms to idle factory equipment to workers in part-time jobs, the economy is stuck with excess capacity.
This signals that even if the economy turns around tomorrow -- and there have been glimmers of stability in recent weeks, including higher stock prices -- the economy is likely to be operating well below its potential for many months, if not years, to come.
Fed officials worry about slack for another reason. When the economy has little of it, inflation becomes a problem because tight supplies allow businesses and workers to demand more money for their services. When there is too much slack, as now, inflation falls.
If the excess capacity becomes deep enough, or persists long enough, it could lead to outright declines in prices known as deflation, something Fed officials want to -- and believe they can -- avoid because it is difficult to unwind.
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued," the central bank's policy-making committee said Wednesday, when it announced it planned to pump additional money into the economy through purchases of government and mortgage securities.
Signs of slack are everywhere. The number of vacant homes dotting American neighborhoods was 19 million in the fourth quarter of 2008, up more than three million over three years. Hotel occupancy rates have fallen from 65.5% a year ago to 55.2% in early March, according to Smith Travel Research, a Tennessee firm that tracks the industry. Manufacturing plants ran in February at 67.4% of their capacity, the lowest utilization rate since the Fed began keeping records in 1948.
In normal times, the Fed would fight slack by reducing short-term interest rates to cut household and business borrowing costs. But the Fed has already cut its target rate -- the federal-funds rate -- to near zero.
That is why it announced Wednesday that it would ramp up purchases of mortgage-backed securities and long-term U.S. Treasury notes. By purchasing those securities, the central bank hopes to bring down borrowing on a broader array of bonds and loans to spur demand.
One example of the slack comes from Union Pacific Railroad, the nation's largest railroad. It has the capacity to run 200,000 carloads weekly, but is running only 150,000.
"As volumes remain soft, we are acting aggressively to right-size our resources, furloughing 3,600 employees, storing over 1,400 locomotives, and parking 53,000 freight cars," Rob Knight, the firm's chief financial officer, told investors in a conference call last week.
The clearest signs of slack are in the job market. On Thursday, the Labor Department reported that
new claims for unemployment benefits slid last week by a seasonally adjusted 12,000 to 646,000,
but the four-week average rose slightly to 654,750, a 26-year high. The total number of Americans
drawing weekly benefits jumped to nearly 5.5 million, a new high.
In all, the number of unemployed Americans has soared to a seasonally adjusted 12.5 million in the past 12 months, pushing the unemployment rate to 8.1%. An additional 8.6 million are working part time but would prefer to have full-time work. When accounting for these workers as well as those who wanted a job but hadn't looked lately, the "underemployment" rate -- a broader measure of job-market slack -- is 14.8%.
That doesn't hurt just the unemployed. It also hurts people who have jobs because it puts downward pressure on wages.
Irex Corp., a Lancaster, Pa., construction-services firm, has laid off about 1,000 workers in the past year, bringing its head count to roughly 1,500. The firm provides construction workers to manufacturers, hospitals, refineries and other companies building large new facilities.
Less than two years ago, Kirk Liddell, Idex's chief executive, had to subcontract work to competitors for some big projects because his company had a hard time finding qualified workers. Now, said Mr. Liddell, "if we put out a call for quality workers, we'd have thousands almost anywhere in the country."
One of the big surprises about this downturn, he said, is its breadth. He had expected work building hospitals to remain steady even as the manufacturing sector is crunched. But hospital work has been squeezed, as has education. The firm just lost a contract for a facility at Harvard University, which has been hit by losses in its endowment.
For U.S. officials, the key to unwinding the slack is boosting demand for goods, services, homes and labor. That is why the Fed is trying to bring down interest rates, and why some economists think Congress will need to pass a second economic-stimulus bill. President Barack Obama's $787 billion stimulus package, passed in February, is meant to aid the economy through spending programs and middle-class tax cuts.
Printed in The Wall Street Journal, page A2
http://online.wsj.com/article/SB123750668316690221.html
No comments:
Post a Comment