Fed Rates Hit 40-Year Low

PPI Records Largest Monthly Decline

The latest economic data indicate that the U.S. economy, already weak before the terrorist
attacks of September 11, slipped into recession. The disruption and insecurity caused by the
attacks and the mailing of anthrax took a toll on third-quarter economic activity.

The Federal Reserve cut short-term rates in its October meeting by a quarter point. This was
the 10th rate reduction this year and brought rates down to a 40-year low.

The civilian jobless rate jumped to 5.4 percent in October, the highest level since December
1996. Non-farm payrolls declined for the third month in a row. The decline of 415,000 jobs, the
largest since May 1980, was on top of a 213,000 drop in September. Employment in construction fell
by 30,000, while factory payrolls went down by 142,000.

The producer price index (PPI) for finished goods declined 1.6 percent in October, the
largest monthly drop on record, led by sharp declines in energy prices, a 0.4-percent drop in food
prices and motor vehicles sales incentives. The core rate of producer prices, which excludes food
and energy prices, declined 0.5 percent in October, following a 0.3-percent rise in September.

The consumer price index declined 0.3 percent in October after rising 0.4 percent in
September. Energy prices plunged 6.3 percent. The core inflation was up 0.2 percent for the fourth
consecutive month.

Third-Quarter Blues

The U.S. output of goods and services declined 0.4 percent at an annual rate, the largest drop
since the first quarter of 1991. Positive contributions from consumer expenditures and federal
government spending did not match investment declines, continued draw-down of inventories and a
drop in exports. Third-quarter growth in consumer spending decelerated to 1.7 percent, while
capital spending on equipment and software declined 11.8 percent. Nonresidential investment in
structures fell 12.1 percent, and exports plunged 18.2 percent. Inventory draw-down accounted for
all of the third-quarter decline.

Inflation was unchanged at 2.1 percent at an annual rate.

Industrial output shrank 1.1 percent in October. Factory output was off 1.2 percent, while
utility output rose 0.6 percent. The operating rate dropped to 74.8 percent from 75.7 percent in

Despite low interest rates, October housing starts fell to 1.552 million units at an annual
rate from 1.572 million in September. Single-family units fell 1.2 percent to 1.242 million, while
multifamily units were down 1.6 percent to 0.310 million.

Business sales dropped 2.8 percent in September, and business inventories fell 0.5 percent
due to disrupted production and shipping. The September inventory-to-sales ratio climbed to 1.45
from 1.42.

Auto, Apparel And Accessories Sales Register Sharp Increases

With interest rates down, auto companies offered zero interest financing, and auto sales shot up
32.9 percent to 10.2 million at an annual rate in October. As a result, retail and food services
sales jumped 7.1 percent in October. Building materials sales surged 2.8 percent, rebounding from a
2.6-percent decline in September. Sales rose 0.7 percent at general merchandise stores but fell 0.5
percent at furniture and home furnishings stores. Apparel and accessory sales rang up a 6.9-percent

Textile output declined 1.0 percent in October after rising 0.3 percent in September. The
operating rate for textiles went down to 71.4 percent in October from 71.9 percent in September.

Shipments by textile manufacturers fell 0.9 percent in September. Total shipments of $61.18
billion through September were running behind last year’s pace by 7.4 percent. With inventories
down 0.7 percent in September, the inventory-to-sales ratio was unchanged at 1.65.

Textile and apparel job losses have accelerated. As the industry’s payrolls shrank 1.4
percent in October, the jobless rate for textile mill workers soared to 9.4 percent.

Producer prices of textiles and apparel declined 0.2 percent in October. Prices edged up 0.1
percent for home furnishings and were unchanged for carpets and for finished fabrics. Prices
dropped 0.9 percent for greige fabrics, 0.8 percent for processed yarns and threads, and 0.1
percent for synthetic fibers.

December 2001