This partial transcript of Special Report with Brit Hume, September 7, 2001, was provided by the Federal Document Clearing House. Click here to order the complete transcript.

TONY SNOW, HOST: More bad news out of Washington and Wall Street: A jump in a unemployment sent stock indexes into a freefall. The Dow lost 235 points. The Nasdaq was off nearly 18. Add a higher jobless rate to a slumping economy, tumbling consumer confidence numbers and growing anxiety about the future and what do you have? A not quite recession.

Here to talk about the problem and possible cures is David Horner, a vice president at Merrill Lynch.

Mr. Horner, let's begin first with the president's assertion that the tax rebates that people are going to be receiving throughout the rest of this month are going to provide much-needed boosts to the economy: true or false?

DAVID HORNER, VICE PRESIDENT, MERRILL LYNCH: Well, there's no question that it will provide some boost to the economy. But there is other factors that are tending to slow the economy down.

So the real question is: Is it enough, along with the rate cuts that we've already seen, 300 basis points, and probably another 50 yet from the Fed, to begin to grow the economy again? And I think that the jury is out on that. And today's employment report certainly doesn't inspire confidence.

SNOW: What other factors?

HORNER: What other factors are coming to help the economy or hurt? Or both?

SNOW: No. You were saying that there were other factors that are tending to make things worse. What are those factors?


One is rising unemployment. When people lose their jobs, they have more Insecurity. They tend to want to save more, and not just those who lose their jobs, of course who have trouble saving more, but who see other people lose their jobs and have a certain amount of job insecurity themselves. That's probably the single biggest risk to the economy right now.

A second factor is that overseas, the growth in many of our trading partners has also slowed down considerably. So if you look, for example, at our exports the last few months, they've been sliding. And that's not good sign either. Third, the manufacturing sector continues to lower its levels of inventories.

For example, in this past month, they laid off another 140,000 workers. We do think, however, that the manufacturing sector is now stabilizing. But there was another number out this morning or yesterday morning, the Nonmanufacturing National Association of Purchasing Managers survey, which indicated that the slowdown has spread to the nonmanufacturing sector or the service and construction sector.

So this is not good news.

SNOW: Some Republicans are suggesting what the president needs to do next is to cut the capital gains tax rate. What do you think about that?

HORNER: Well, over the longer run, I think anything that helps businesses return to profitability or increase profitability and provides an incentive to invest is excellent. I have no problem with that. Over the short run, I don't think it does a lot to boost consumption. Right now, it's basically the households that have to come through with consumption, because there's a lot of unused capacity right now. Therefore, while I might be in favor a capital gains tax longer term, it won't do much for the current economy.

SNOW: In the short term, then, would you recommend some sort of further tax cut, specifically a tax rate cut?

HORNER: I don't think so. I think that, right now, our biggest problem for the future, as we look into the future, is we need more investment. We need to spur investments.

I would be more inclined to give any further tax cuts, if we have any, to businesses to promote investment. But, frankly, right now, we just need lower interest rates. I don't think we should mess much with the fiscal system right now. We've already got a nice tax cut. I think we should let that work and lower rates more.

SNOW: Are we suffering through deflation?

HORNER: No, but it is disinflation. And what I mean by that is that -- and there are some areas, of course, where prices are going down. But to get deflation, you need a situation like in Japan, where the general price level is going down. We're nowhere near that. Our prices are still actually increasing by about 2.5 percent per year.

And I don't see much change in that over the next year, although I do see inflation coming down. And that's good, as long as it doesn't turn into deflation. There's very little risk of deflation here, We are, however, having price cuts in commodities, for example.

And worldwide, there are areas where we have deflation, but not in the United States.

SNOW: All right. Now, many people contribute at least part of our present unpleasantness to the Microsoft case, pointing out that Nasdaq began its freefall the day Thomas Penfield Jackson called Microsoft a monopoly. The administration now seems to have given up any hopes or any desires of breaking up Microsoft. Will that decision have any impact at all on tech stocks?

HORNER: I don't believe so.

I think the real problem was, as Greenspan warned several years ago, there was a chance that, because things were going well -- and they did go quite well -- we would get overly enthusiastic. Investors would pay too much for stocks. Business executives would make decisions based on enhanced growth that just wouldn't materialize.

As a result of that, the slowdown that we're seeing is really a rationalization of that exuberance. And, unfortunately, we're just going to have to grit it out. We do think we'll have some growth in the second half, though, because the Fed has been very aggressive in lowering rates. This will help as time passes.

SNOW: So the exuberance was irrational. You say that interest rates are too high. Aren't they approaching historic lows?

HORNER: They are. But in an economy like this, you need very low rates to offset the negative impact of rising unemployment.

Keep in mind that over the last four years, we had very good time. And we needed high rates to curb slow the exuberance, to slow down the economy so it wouldn't grow so fast that we would have an inflationary boom. Now the situation is in reverse. Now we need lower rights to prevent the disinflation, which is good, to becoming deflation, which is bad, as happened in Japan.

By the way, I think there are a lot of structural differences here. Our economy is in much better shape than Japan's. But we still need lower rates to get through this period. And I believe the Fed will accommodate us by easing again on October 2 and then probably even maybe before the end of the year.

SNOW: Now, the White House is telling people it's absolutely sure that in the fourth quarter, things are going to turn around, that the economy is going to show new strength. Do you see anything in the numbers to support that hypothesis?

HORNER: We do think there will be more growth in the fourth quarter. Simply the effect of all the lower rates we've had -- see, lower rates work with a lag. And so we really haven't had time enough yet to see the lower rates begin to work.

But one sign I see, for example, is that households are refinancing their mortgages at lower rates now. If you look at the index of refinancing in the last month and a half, it's gone up quite a bit. What that does is put more income into the hands of consumers so that they will consume more. And that will help to get the economy going.

The tax cuts, $38 billion, passing into consumers' hands over a 10- week period, that will give a bit of a boost as well. And, thirdly, the manufacturing sector, which curbed production so it could lower inventories, even though it's facing lower demand, will now have to raise production in the next six months to begin to meet the ongoing demand.

However, it is going to be very uneven.

SNOW: OK. Thanks.

Click here to order the complete transcript.

Copy: Content and Programming Copyright 2001 Fox News Network, Inc. ALL RIGHTS RESERVED. Transcription Copyright 2001 eMediaMillWorks, Inc. (f/k/a Federal Document Clearing House, Inc.), which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon Fox News Network, Inc.'s and eMediaMillWorks, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.