The Federal Reserve Board announced a further cut in its key discount rate yesterday as the government, in a revised report, said national output of goods and services did not rise at all in the third quarter of this year.
The Fed said it was reducing the discount rate from 9.5 to 9 percent, effective Monday.
Many economists say further reductions in interest rates are necessary if the floundering economy is to recover. The recovery has not occurred as expected, and a Commerce Department official, announcing that there was no increase in output last quarter, said the economy might be flat this quarter as well. The stock and bond markets also have been looking to interest rates; stock and bond prices rose dramatically when the discount and other rates fell earlier this year.
The Federal Reserve said its decision was "broadly consistent with the prevailing pattern in market rates" and cited a "background of continued sluggishness in business activity and relatively strong demands for liquidity."
The discount rate, charged to banks that borrow from the Fed, has now been lowered six times since July, when it was 12 percent.
Instead of the slight increase in the nation's total output that was first reported for the third quarter, the Commerce Department now believes the gross national product was unchanged from its second-quarter level, once the effects of inflation are taken out. The recession has continued into the current quarter, economists believe, with recent figures showing a further decline in employment and production during October.
Robert Dederick, commerce undersecretary for economic affairs, said yesterday that the GNP in the fourth quarter may show a small upturn but also "could easily be down."
Dederick said, however, that he expected recovery to get under way soon, as interest "rates are now low enough for the recovery process to occur." Rates "were just too high last spring" for the economy to sustain any improvement, he said.
One relatively bright spot in yesterday's report was that corporate profits picked up slightly in the three months from July to September. After-tax profits rose 1.2 percent in the second quarter and 2.4 percent in the third quarter, the Commerce Department reported.
Operating profits from current production climbed 6.8 percent in the third quarter, yesterday's figures showed. A measure of corporate cash flow -- retained earnings plus depreciation -- also was up, Dederick said, from $263.5 billion in the second quarter to $272.3 billion.
Inflation, on the GNP measure, was 5.6 percent in the third quarter, the report said. This was a downward revision from 6.1 percent. In the second quarter this measure of inflation rose by 4.1 percent.
Analysts differed yesterday over the immediate prospects for the economy. "The fact that profits were increasing was very good," David Cross of Chase Econometrics said. However, "We don't see any evidence of the economy picking up," Donald Straszheim of Wharton Econometrics commented.
The downward revision in the GNP came largely because of worse-than-expected trade performance. The strong dollar, coupled with the continued depression of U.S. export markets, has hit at exports and helped raise imports, Dederick said. This "will be an important drag on the economy when recovery begins," Straszheim said.
The only reason the economy held steady in the third quarter was that inventories were built up -- probably involuntarily. Real final sales, which exclude the effect of inventory changes on the GNP, were down at an annual rate of 1.8 percent in the three months, the Commerce Department said. This followed a decline of 0.9 percent in the second quarter.
The economy is likely to be pulled down by a wave of inventory liquidation in the final quarter of the year, Dederick said. Auto companies, which built up unwanted stocks in the third quarter because sales were much weaker than expected, are now running these stocks down. This could knock 2 percentage points off the annual GNP rate in the fourth quarter, Dederick said.
There is so much slack in the economy now that "financial markets should not panic" if the economy grows at more than the "moderate" 3 percent or 4 percent rate widely expected, Dederick said. A few quarters of faster growth, at 5 percent or 6 percent rate, "could be quite attainable by the end of next year," he said.
The economy will likely be very sluggish in the initial stages of recovery, however, as business spending remains very weak, he said.