Three Steps That Can Ward Off Recession


On Mar. 5, the National Association of Manufacturing presented its economic outlook at its annual trade show in Chicago. And a gloomy outlook it is. Based on a mid-February sampling of its 14,000 members, four out of five manufacturers expect no growth in their sector in the first half of 2001, with 44% saying they're already in a recession. Two-thirds also see earnings rising by less than 3% in the first half year-over-year, despite hefty cuts in capital spending and payrolls.

W.R. "Tim" Timken Jr., the association's chairman this year, can vouch for the findings firsthand. The chairman and chief executive of Timken Co. has laid off 250 employees and put much of the rest of his 11,000-person payroll on four-day workweeks because of a sharp falloff in sales of the company's bearings and specialty steel. He has also let go all temporary workers and slashed capital spending at his Canton (Ohio) company -- $210 million at the start of last year, vs. $150 million in 2001. But even after months of declining business, Timken is getting no uptick in orders from clients that include Caterpillar and General Motors.

So what's his prescription for jump-starting the economy? Timken has a three-part fix: Lower interest rates, lower taxes, and a lower dollar. But he warns that if the factory sector doesn't get quick relief, the entire U.S. economy will join his $2.6 billion company and other basic manufacturers in a recession later this year. Timken spoke with BusinessWeek Correspondent Michael Arndt at the start of the manufacturing show in Chicago. Here are edited excerpts from their conversation:

Q: Are you seeing any pickup in orders?

A: I can't say that every order in every sector is down for us. There are some industries that are going up, aerospace for one. Oil and gas, anything related to energy is way up. But in the main, our large customers, such as vehicle manufacturers, have been going down for some time. Most disturbing to me was at the end of February: We've seen a slide-off in the "all other" manufacturing sector, which was improving a little bit last year. Part of it is relativity. If you're off 35% in 2000 and only off another 5% in 2001, it looks better.

Q: Do you subscribe to the theory that this is going to be a two-quarter slowdown, and, by the second half, we'll be back?

A: If the Fed cuts interest rates another 100 basis points in March, and another one after that, if tax reductions are passed promptly, and hopefully retroactively, and if the dollar weakens, I think there's a chance that we'll avoid a general recession. Those things must be done. If you tell me those things won't happen, then I'm very pessimistic.

Q: Do all three have to happen?

A: Yes. Yes. Yes. We cannot rely on the Fed. We must have a tax cut. And a weaker dollar would certainly help. I think the tremendous trade deficit is ignored by people. A lot of stuff that could have been produced in the U.S. is being produced someplace else. The dollar is a problem. I'd like to get rid of high interest rates and high taxes, and I personally would like to see the government talk the dollar down. I know the government says that's not their job, but other countries do it.

Q: Do we need to do this immediately?

A: The sooner the better. Why wait? Because so much of this is mentality: If businesses are saying, "I don't like the way the economy is right now, I'm going to be real cautious," then that feeds on itself. If that extends to people because they're unsure, because they're having shorter workweeks or being laid off, they say, "I'm not going to spend." That's what starts a recession.

The most important thing is hours worked, because this comes back to what people have in their pockets. If you're working 35 hours instead of 50 hours a week, you've got a lot less money in your pockets. That's a quick hit. Now people say that if we cut taxes and interest rates, people won't have that money in their pockets until July or August. But if you know you're going to get a $2,000 tax cut some time this year, you'll have a different frame of mind.

Q: One of the other things Fed Chairman Greenspan also has to consider is inflation. What are you seeing in terms of higher prices?

A: Our membership says nobody can raise prices. We cannot raise prices. Our customers are all coming after us for price reductions. In times of economic weakness, companies' earnings go down, and they look around to see how can they improve their earnings...often, the first thing they do is look to their suppliers.

Q: Are you seeing any foreign markets coming to your aid right now, to offset weakness at home?

A: No. South America is beginning to weaken. Mexico is beginning to get weaker. Canada is about the same. The European economy, obviously, with the weak euro is tough to sell in. And with a weak yen, it's tough to sell in Japan.

Q: Say you get all that you want: a tax cut, lower interest rates, a weaker dollar. Do you think 2002 will be a decent year?

A: Yes, I do. I believe the American economy as a whole is stronger than it has ever been. Despite the reductions that have occurred, the potential of our economy is enormous. And if we could get the psychology turned around, I think we'll be fine.


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