Sending the Wrong Message

The more days that pass, the more I see American consumer demand for products simply faltering.

Ford Motor Company, the world’s second-largest automaker, said Wednesday it would slash vehicle production at two of its Canadian assembly plants because of bloated inventory. Ford is planning seven weeks of scheduled layoffs at the plants between October 2004 and March 2005, affecting about 6,600 workers.

Ford is not the only manufacturer hurting. The Federal Reserve Bank of Philadelphia reported this past Thursday that its gauge of regional manufacturing activity fell in September to its lowest level since July 2003.

Is it any wonder that weak consumer demand and a massive amount of cheap goods made in China and now being imported into the U.S. are resulting in low inflation? Last week, the U.S. Department of Labor reported inflation rose by only 0.1% in August – half the number analysts had been expecting. Year- over-year, the consumer price index (CPI) has increased by a paltry 1.7%. This generation has never lived in such a low inflationary environment.

Where am I going with all this? All my business-owner friends are telling me they are having hard times. Whether it is in retail, manufacturing or services, times are tough. Based on the current economic conditions, you would think Greenspan wouldn’t be raising interest rates.

However, if we look at our very recent history, low interest rates have not made consumer spending buoyant. All low interest rates have done is to spur consumers to upgrade their homes or to add a second home to their holdings. (I read somewhere this weekend that the only reason Greenspan was raising rates was to cool the heated the real estate market. Anything is possible. Maybe he’s taking a cue from a mistake in the late 1990s, when he took too long to cool the tech bubble).

By raising rates, Greenspan is telling us that the economy is okay and that it can sustain a move back to normal interest rates. If Greenspan did not raise rates tomorrow, he’d be sending the message that the economy is still very weak. And I don’t think he would want to send that message right now.