GORDON PLATT'S CREDIT OUTLOOK

GORDON PLATT'S CREDIT OUTLOOK

LOWER INTEREST RATES may be needed soon to keep the U.S. economy from stalling.

Economists said the slump in manufacturing is deepening and appears to be affecting segments of the service sector."One of the most misleading facts about the U.S. economy today is that manufacturers employ less than 18 percent of the work force," said David H. Resler, senior vice president and chief economist at Nomura Securities International Inc. in New York.

"A large segment of the services sector is devoted to transporting, selling and servicing the goods produced by manufacturers," Mr. Resler noted. ''And now, the soft demand for manufactured goods appears to be spilling over to affect some service industries."

Mr. Resler said the economy may find it increasingly difficult to maintain even the subpar growth of the last two quarters, but the Federal Reserve is unlikely to ease its monetary policy "until the markets make a move first."

Interest rates will begin to fall when market participants expect lower inflation, he predicted, adding that "aggregate demand (for goods and services) has been weak and the market hasn't been alerted to that fact."

The next reading on inflation will come Friday, when the producer price index for March will be released. Economists said lower energy prices likely offset rises in food and clothing prices, resulting in a minimal rise in the March PPI.

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A POTENTIAL WARNING SIGN that monetary policy has begun biting into economic growth can be found in the Fed's flow of funds statistics, said Gary Schlossberg, vice president and senior economist at Wells Fargo Bank, San Francisco.

Inflation-adjusted growth in non-financial debt has declined to its lowest level since the last recession in 1982, Mr. Schlossberg said.

Weak increases in debt reflect a sluggish economy, as well as a higher savings rate and concern about debt levels, he said.

Growth in the economy appears to be "tailing off" after a weather- related rebound early this year, and the emerging credit squeeze is a ''wild card" in the economic outlook, the Wells Fargo economist said.

"There's little the Fed can do directly to alleviate the problem," Mr. Schlossberg added. "The credit slowdown has been triggered by lenders responding to economic uncertainties, credit-quality concerns, regulatory pressures and stiffer capital requirements, not by tighter monetary policy."

The credit crunch is unlikely to be as severe as those in the 1970s and early 1980s, which contributed to severe recessions, he said. One reason is that savings and loans have accounted for a diminishing share of credit supplied to the financial markets in the last decade.