WASHINGTON -- Friday's report announcing that orders for big-ticket manufactured goods skyrocketed during July will cause the Federal Reserve to at least pause before lowering interest rates again, but without further signs of solid economic recovery, an easing still is possible, analysts said Friday.
The Commerce Department reported that orders for durable goods surged 10.7% in July, the largest such increase in over 20 years. Although nearly half the increase was attributed to a spurt in aircraft orders, which vary widely from month to month, most other industries also experienced sizable increases, economists said. Thus, the report provided the most positive sign to date that the industrial recovery is gathering steam, they said.
"This report is significant" because Federal Reserve Board Chairman Alan Greenspan views a pickup in durable goods orders as a key ingredient of any developing recovery, said Jeremy Gluck, an economist with Mitsubishi Bank.
Nevertheless, the report on its own may only delay further easing by the Fed, unless other reports confirm that recovery is well under way. Otherwise, the Fed is likely to ease because of concerns over other factors.
These factors -- including continuing job losses, anemic money supply growth, and the intransigent credit crunch -- probably caused the Federal Open Market Committee at its Aug. 20 meeting to adopt a policy which leans toward easing in the next six weeks, said Mr. Gluck and Philip Braverman, an economist at DKB Securities Corp.
Despite the pickup in manufacturing, the decline in services jobs, particularly in state and local governments, continues to worry the Fed and put a damper on the economy, the economists agreed. The Fed was moved on Aug. 6 to reduce the federal funds rate for the first time in three months to its current target level of 5.5% because of a weak employment report.
Thus, the central bank is most likely to ease again if the August payroll report, to be released on Sept. 6, does not show a rebound in jobs and workers' hours, Mr. Gluck said.
Another growing concern for the Fed is the contraction of the money supply over the last month, he said. The widely watched M2 measure of money dipped below its target range of between 2.5% and 6.5% for the first time during the week of Aug. 12, he pointed out.
The decline in the money supply opens the Fed up to criticism from the Bush administration and Congress for failing to attains its targets, and adding to the Fed's own concerns, such criticism could contribute to another easing, he said.
That is even though the Fed and most economists are unsure why the money supply is shrinking and whether the decline will prevent the economy from growing again.
Mr. Gluck said the decline may merely signal a recent change in investment habits. Depositors at thrifts taken over by the government in recent months may be transferring their money from accounts such as certificates of deposit, which are measured in M2, into instruments like bond funds, which are not included in M2, he said.
Also, other investors may be attracted to higher-yielding instruments and depress the moeny supply by shifting their bank deposits to them, he said. Mr. Gluck added that such a shift in investment patterns represents no threat to the economy.
Fred Sturm, economist at Fuji Securities Inc., said it is not entirely clear what is motivating the Fed to lean toward lower rates at this time. But the central bank has clearly signaled its bias to the markets, and he does not expect the robust durable goods report to prevent another easing.
Mr. Sturm added that, despite last week's news accounts to the contrary, "I don't think the coup in the Soviet Union, or demise thereof, will have any impact whatever on U.S. monetary policy."
Meanwhile, the Fed reported on Friday that, as expected, it maintained a neutral policy in the six weeks that began July 3 because -- at the time -- it believed the recession was over. Recent comments by Fed members -- as well as the central bank's easing earlier this month -- indicate that the Fed has become less optimistic about the economy.
Several of the Fed's latest concerns were foreshadowed in the July Federal Open Market Committee minutes released on Friday, including worries about the prolonged credit crunch and the related weakness of financial institutions, and the contracting money supply.
"The behavior of both debt and money were cautionary signs that needed to be monitored carefully," Fed members concluded in July.