US fails to respond to rate cuts

The Federal Reserve, America's central bank, dashed hopes of an early recovery in the world's biggest economy when it warned yesterday that despite 11 cuts in interest rates last year the US remained "weak" as it entered 2002.

Share prices fell sharply on Wall Street as dealers took fright at official figures showing American manufacturing contracted by 3.9% last year, its worst performance since 1982. Fed data showed a 0.1% fall in December, the 11th drop in the past 12 months, and more capacity than at any time for almost 20 years.

With consumer prices falling in December as retailers sought to compensate for weak demand in the shops, analysts believe that a further cut in borrowing costs is now all but inevitable when the Fed's open market committee meets at the end of this month.

The continued problems of the US economy were underlined when General Motors, the world's largest carmaker, reported a dramatic fall in full-year profits to $1.5bn, down from $5bn in the previous year - illustrating the intensely difficult conditions facing the industry.

GM is the only one of the big three carmakers in the US, the others being Ford and DaimlerChrysler, expected to have made a profit at all this year in the face of increasing competition from Asia and Europe, and the tough economic climate.

Ford will report its full-year earnings later today and is expected to post a loss of $5.4bn including a fourth-quarter charge of about $4.1bn to cover the cost of a wide-ranging restructuring. DaimlerChrysler will report full-year figures next month.

The industry's attempt to kick-start sales after the September 11 terrorist attacks with zero-finance deals triggered record sales in the US during the fourth quarter. But profits during the three-month period still fell from $609m to $255m.

GM, which precipitated the zero-finance initiative subsequently adopted by Ford and DaimlerChrysler, launched a follow-up offer last week: a cash rebate of $2,002 on new cars and trucks.

During 2001, GM managed to increase its market share in the US for the first time in 10 years, in large part at the expense of Ford. GM gained a 0.3%-point share to 28.1% of all US vehicle sales.

The company's global market share also improved marginally, from 15% to 15.1%

"They are definitely performing better than their domestic rivals and they seem to have future momentum that the other guys don't have," said analyst Nicholas Lobaccarco of Lehman Brothers.

GM chairman Jack Smith took encouragement from the year's results. "Our performance was quite strong considering all the challenges we faced and we intend to continue building momentum throughout the coming year," he said.

"Our market share gains demonstrate that GM's dedication to developing innovative new products is paying off in the market place."

A return to greater product innovation was the central message delivered by Ford last week as it detailed the sweeping changes at the company, including 35,000 job losses.

The weaker results from GM mean that executives will forgo bonuses under the company's annual incentive award and workers will not take anything from the company's profit-sharing scheme.

The picture for GM in Europe was worse, with the combined operations including Opel in Germany recording a loss. GM said it would place continued emphasis on reducing costs to help push the revenue performance through to improving profits.