Recession Feared

PARKERSBURG — While the Federal Reserve has reacted to signs of a U.S. economic recession by slicing the prime lending rate, one local economist says more needs to be done.

“There are clearly some challenges facing the U.S. economy,” said Greg Delemeester, Ph.D. microeconomist at Marietta College.

Delemeester says his school of interest is focusing on a particular industry or business sector. However, Delemeester said his reading of other economists’ work leads him to believe there’s a good possibility the U.S. economy is heading for a recession.

“The probability of a U.S. recession is 50 percent if not growing,” he said.

Sy Sarkarat, Ph.D. and professor of economics at WVU-P, said the reality is the a deep economic slowdown will affect millions.

“As the economy slows down there will be less jobs both domestically and worldwide,” he said. “When the economy slows down unemployment and income declines.”

“The subprime mortgage crisis is taking a big hit out of some financial firms, and those firms are going to have the pay the piper for those risky loans they were extending,” he added. “Likewise, the borrowers who jumped on the teaser rates offered by these institutions they bear some of the burden as well.”

In response to downward spiral of the economy the Federal Reserve cut the federal funds rate by 0.75 percent Tuesday and indicated further cuts were likely. The markdown was the biggest one-day rate move by the central bank since 1991.

Analysts said the Federal Reserve will likely delay cutting rates further at its Jan. 29-30 meeting but will probably keep moving rates down aggressively as the economy continues to weaken.

“This move is not an instant fix,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics. “The economy is still staring recession in the face, but at least the Federal Reserve now gets it.”

In addition to cutting the funds rate, the Federal Reserve said it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4 percent.

Commercial banks responded to the Federal Reserve’s action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25 percent down to 6.50 percent.

The Federal Reserve’s action was the most dramatic signal it can send that it is concerned about a potential recession in the United States.

While the Federal Reserve cut rates, politicians are considering a number of stimulus packages to jumpstart the economy. Some of the package ideas include temporary tax cuts and an $800 tax rebate. Delemeester doesn’t appear to favor the stimulus package some politicians are proposing.

“Tax cuts aren’t always as effective as proponents believe,” Delemeester said.

Delemeester said the last time such a measure was proposed (around the turn of the century) the tax rebates were saved rather than spent.

“It didn’t have the stimulative effect policy makers were hoping for. I fear that is going to happen to again,” he said. “People will pay off existing bills without stimulating the economy.

Sarkarat disagrees with Delemeester’s view.

“A stimulus package will have an affect on budget allocations for consumers,” Sarkarat said. “This type of allocations or rebates help the local economy.”

Sarkarat maintain area consumers would spend their money in the local economy, which will have a multiplier effect.

“The spending may lead to additional employment. Ultimately, that generates more income, spending, employment and possibly savings.”

Sarkarat acknowledges the stimulus package is a short-term fix to a long-term problem. He noted the last stimulus, postponed the nation’s economic slowdown.

Sarkarat is proposing the need for long-term small business tax cuts and income tax reduction.

“That enables households to retain additional income,” he said. “That will boost consumer confidence and investor confidence. As a result, that will lead to investment and consumer spending.”

“The measures taken by the Federal Reserve and the president are positive measures,” Sarkarat added. “A permanent policy and solution must follow.”

Instead of the proposed stimulus package, Delemeester recommended a reduction in marginal income tax rate an investment tax credit.

“Give businesses an incentive to go out and invest in a plant or equipment that might provide some stimulus in a short run.”

The Associated Press contributed to this report

Contact Jody Murphy at j'>jmurphy@newsandsentinel.com'>jmurphy@newsandsentinel.com