Rate cut is small step for economy

By Published on .

Most Popular
Alan Greenspan, party animal? Maybe not.

The Federal Reserve Board chairman acted aggressively last week to keep the economic good times going with a sharp and sudden cut in interest rates. But marketing and media observers agree that it will take more time and effort to overcome the pressures on the economy.

The Federal Open Markets Committee's surprise decision to lower interest rates by 0.5%-done well in advance of the next FOMC meeting Jan. 30-31-was a signal to analysts that the Fed will act decisively to avoid a recession. But many industry executives remain worried that the slowing economy will lead to wholesale cuts in media and marketing in 2001, despite pockets of optimism. (AA, Jan. 1).

"Everybody is pessimistic," said Bill Koenigsberg, president and CEO of Horizon Media Services. "All the signs point to a soft media marketplace," with no new categories to replace the failing dot-com businesses. He also suggested that the growth in media choices, which splits up the advertising pie into broadcast, online, outdoor and other advertising venues, is a variable that "continues to point to a softening in the marketplace."

The media sellers "showed no mercy a year ago when they saw the balloon getting bigger and bigger. And now that it has burst, they are crying," Mr. Koenigsberg said.

"The simple issue is that it will be a tough year, even after the interest-rate cuts, which was a godsend," said Michael Lotito, president and CEO of Initiative Media. He noted that over the summer, when the market was still strong, media executives had forecast growth at 15%, but now are stuck with a flat market and will fall short.

There are optimists, such as John Perriss, CEO of Zenith Media Services, who insists the party is not over. Mr. Perriss late last year factored Fed rate cuts into his generally positive ad spending forecast.

"We were saying it would be a soft landing because basically that's the job of government to create infrastructures to allow business to prosper," Mr. Perriss said. He believes President-elect Bush's tax cut and lower interest rates will stimulate the economy and spur more advertising.

"The Fed won't permit the U.S. economy to go down the tubes. It will do whatever it takes," said Bruce Steinberg, chief economist at Merrill Lynch & Co.

After the rate cuts, the good times rolled again on Wall Street-at least for one day. The Dow Jones Industrial Average shot up 365 points within 15 minutes of the rate announcement and closed up more than 299 points that day. The Fed action also defibrillated moribund tech stocks in the Nasdaq Composite Index, which rallied about 324 points, one of its largest one-day point rises on record.

So will the party go on, after all?

Probably not.

Peter King Hunsinger, publisher of Vanity Fair, called the stock market spike a "dead cat bounce"-Wall Street slang for a brief upswing in a depressed a market.

"If it was only that simple-lower [rates] a point and everything's fine-then we ought to hang Alan Greenspan for not doing it two months ago," said Kent Brownridge, general manager of Wenner Media.

The recession-like hangover will go on until publishers see car sales pick up again, "because Detroit looks so grim this year," said Ken Wallace senior VP-corporate sales and marketing, Gruner & Jahr USA Publishing, New York.

Indeed, said Mr. Brownridge, "I'll feel a lot better when I see car sales start to improve. Then I'll know we're past this. Consumers have to feel good about where they are, where incomes are going. They have to feel positive about their future: `It's time to get that new SUV.' If they're feeling like-`Oh shit, going to be a bad year. Oh my God, I don't know what's going to happen to my company'-then things are not good."

Analysts were quick to caution a one-day stock surge does not a rebound make, and rate cuts can take up to six months to have an effect on the economy at large. On the technology front, analysts saw the Nasdaq spike not as a chance for investors to continue playing, but a way to cash in their chips. Indeed, the markets tanked again by week's end. The Dow ended Friday at 10,662.01, down 250.40 points, or 2.3%. for the day The Nasdaq ended the week at 2407.65, down 159.18 points, or 6.2%, for the day.

The Fed cut won't affect corporate spending on information technology in the short term, said analysts. In fact, they noted the sector is still dealing with last year's rate cuts.

The latest cut may make IT budget cuts less likely, said Merrill Lynch technology strategist Steve Milunovich. Rate cuts have been historically good for the sector, he said, but he added the companies still won't see a dramatic change in earnings in the next six to 12 months, which will keep their already slower spending on neutral.

"Over the next six months, [tech companies'] ad spending will be under pressure," he said. But he added he expects a pickup in the second half of 2001.

However, many other factors besides interest rates can pull down the U.S. economy, including high energy prices and a softer employment market.

Retailers, too, are skeptical. The holiday 2000 shopping season was anemic, the Fed action did nothing to change grim forecasts.

"We have a few major problems in the retail sector which the interest-rate drop won't fix," said Walter Loeb, publisher of the Loeb Retail Letter. With disappointing holiday sales, retailers will be facing a "worse-than-anticipated situation" in January and February, he said. "They will be trying to create sales in order to try and move the merchandise," he said.

Compounding the problem are retailers that are liquidating-Montgomery Ward, Bradlees-or closing stores-Sears, Roebuck & Co., Office Depot, Paul Harris.

Meanwhile, "there is no change in the consumer mood," Mr. Loeb said. Buyers will keep holding on to their wallets and a recovery will take more time, he said.

"Look, I'd like nothing more than a soft landing," said Initiative's Mr. Lotito. "If Greenspan can manage a soft landing ... then that would be great. But my feeling now is that even if clients don't cut budgets, the media marketplace will be soft. And there will not be much fun in Mudville."

Contributing: Alice Cuneo, Tobi Elkin, Jon Fine and Richard Linnett

In this article: