Byline: Vicki M. Young / With contributions from Scott Malone / Eric Wilson / Shirliey Fung / Leonard McCants

NEW YORK — Apparel and retail issues proved less resilient than in recent weeks Tuesday, as the Dow weathered its third 200-point drop in two weeks in reaction to investor disappointment with the Federal Reserve Board’s decision to cut interest rates by only a half percent.
Industry executives said the Fed’s action only added to the cautious outlook for the rest of the year.
Stocks, including fashion and retail, had climbed earlier in the day as investors were hoping for an aggressive move by the Fed — a hefty three-quarters of a percent cut — to boost what has been a slumping economy and the stock market’s swoon last week. However, the Fed ran true to form in cutting rates by the same half-percent cut in two earlier moves since January. Total cuts since the beginning of the year are 1.5 percent from the 6.5 percent peak, placing the rate at 5 percent.
Three specialty retailers that had moved up on earlier upgrades — American Eagle Outfitters, Abercrombie & Fitch and Pacific Sunwear — lost ground, although another recent upgrade target, Nordstrom, moved ahead slightly.
The Fed in a statement said: “Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption.” The Fed noted that, rather than threatening productivity, recent developments have led to excess production.
The Dow Jones Industrial Average, which bolted upward in early trading, finished the day down 238.29, or 2.4 percent, at 9720.82, translating into a 300-point swing between its high and low for the day. The Nasdaq hit yet another 52-week low, dropping 93.74, or 4.8 percent, to close at 1857.44.
Maury Harris, chief economist at UBS Warburg, in a research note following the Fed’s action, predicted subsequent reductions to 3.5 percent by either the June 26 or Aug. 21 Federal Open Market Committee meeting. Although the cut was only a half-percent, the “language in the statement was extremely friendly, strongly suggesting an intermeeting move if the data weakens significantly over the coming month,” he wrote.
“In our judgment, against a backdrop of shaky consumer confidence, deteriorating labor markets [evident in rising claims for unemployment insurance], contracting household wealth and too-high inventories, the Fed likely will reduce the funds rate to 4.5 percent no later than the May 15 FOMC meeting,” the economist wrote.
Harris, who on Monday had predicted a half-percent interest rate cut, said stocks have been a more serious concern than data reported by the government, so far. For example, jobless claims exceeded 370,000 for the third straight week, a sign of weakness, but retail sales held up in January and February combined. Sales dropped 0.2 percent in February, but January’s gain was revised up to 1.3 percent from 0.7 percent.
Adam Winters, senior vice president at Merchant Factors Corp., said that reports from his firm’s clients have indicated that, so far, orders for spring are “nothing to write home about. Orders have been slow through March, with no real pickup in sight. We expect that clients will remain conservative this year, and refrain from taking big inventory positions. As an industry, the ones that will do well are the ones who are conservative in their business planning.”
Mark Mendelson, president of Tahari, said based on market conditions, management had planned for a “lean and mean 2001” because the firm had anticipated a downturn in the market. The important thing being to focus at this point on creating a positive retail environment. “Based on what’s selling now, things are really good,” he said. “The traffic is probably down in major cities more than it is in the branches, but there are still important places where the business is good. People may be more discerning, but they’re still buying.”
Gregg I. Marks, president of Kasper A.S.L. called the Fed’s decision “disappointing,” but noted that fluctuations in the stock market do not affect his business as much as other economic conditions. “The unemployment rate is the most important thing,” he said. “Are people working, making money, buying things and paying taxes?”
James Martin, president of apparel fabrics at Danville, Va.-based Dan River Inc., noted: “I would like to sit here and say, ‘It’s going to stimulate people to get out there and start purchasing clothing,’ but I don’t know that that’s true.”
The biggest factor, in his mind, is what effect the interest rate cuts have on the stock market, which many Americans now see as an indicator of their financial well-being. “The hopes have been, of course, that the cuts would stimulate home growth, which stimulates jobs, which stimulates purchasing,” he said. “It all relates to how the good old John Q. Consumer is spending.”
According to Calvin Schnure, senior economist at J.P. Morgan Investment Bank, labor markets will continue to weaken. He expects that recent announcements of layoffs will hurt consumers’ pocketbooks, while the combination of a negative wealth effect — consumers’ perception of reduced wealth as prices of the stocks in their investment portfolios drop — will have an impact on consumer spending.
“We’ve cut consumer spending growth in half from 4 to 5 percent to a 2-percent range this year. Slower income growth, the negative wealth effect and energy costs will take a bigger bite on the pocketbooks,” he concluded.
Kurt Erman, president of Notations, a moderate blouse house, said: “I don’t think it’s going to make that much difference in the apparel industry. I think it’s going to take a while before people start feeling comfortable going out to make a lot of purchases, until the market starts stabilizing.”
Bernard Holtzman, president of Harve Benard, said: “It helps people buying homes. I don’t think it affects my customer at all. It’s probably not the last of cuts either.”