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Archive for Tuesday, December 5, 2000

Economy may eclipse election

December 5, 2000

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Just as that bright yellow Ryder truck was trundling north on the Florida Turnpike, the Nasdaq market was bleeding crimson red. The national media barely noticed the latter. Indeed, the colorful theatrics of the political drama have crowded out a slew of bad economic news.

For those interested in what the next president will do (in addition to who he will be), the weakening economy is at least as big a deal. What are the prospects for promised new programs and tax cuts if the economy tanks? The answer is: not good.

Heavy with high-tech stocks, the Nasdaq is the New Economy's bellwether exchange. By Thursday, the Nasdaq composite index had plunged 50 percent from its high last March. The telecommunications and computer sectors were down 75 (!) percent.

The market rallied somewhat on Friday, but only because investors went bargain hunting. "Investors Scraping Flattened Stocks Off Pavement," TheStreet.com graphically noted in its Web site headline.

As lawyers frolicked in the Florida sunshine, gray economic reports drizzled down on the nation's businesses. For example, American consumers are beginning to lose their enthusiasm for spending.

Mood swings among shoppers bring big changes to an economy like ours. Consumer spending accounts for about two-thirds of America's economic activity.

The Conference Board announced that consumer confidence has fallen sharply since May. Consumer confidence measures how Americans regard their future financial situation. In the latest survey, consumers expressed concern that jobs would be harder to obtain in the next six months.

Harder statistics bear out their pessimism. The number of Americans seeking first-time unemployment benefits soared to its highest level in two years, the Commerce Department reports. Also, personal income fell in October for the first time in two years.

Meanwhile, the gross domestic product grew during the third quarter at its slowest pace in four years. The summer's annual growth rate of only 2.4 percent compares most unfavorably with the hot 5.6 percent rate of the second quarter. The GDP reflects the total amount of goods and services produced by American workers.

Manufacturing activity has been decelerating for several months. On Friday, the National Association of Purchasing Managers announced that its index dropped in November for the fourth month in a row. The Chicago Purchasing Managers index gauges industrial health in the Midwest. That number dropped to its lowest level in over nine years.

In other discouraging news, the after-tax profits of U.S. corporations rose by a pathetic 0.6 percent in the third quarter. This is the worst showing in two years.

And oh yes, existing-home sales fell in October. That means that if you live in a house that exists, you may have a harder time selling it.

Some economists insist that while the economy has obviously lost altitude, it is headed for a soft landing. For one thing, the slowdown has done a good job of moderating inflation. And as for those Nasdaq tech stocks: A lot of them were just ridiculously high-priced to begin with.

But Americans seem less and less able to protect themselves from even mild downturns. One might think that a fat economy would lead people to save up for the lean years ahead, but they don't.

Consider the rising personal-bankruptcy rate. Many American families have bought so much stuff on credit that even a small increase in interest rates would push their finances over the edge. That's why the number of people filing for bankruptcy recently resumed its climb. (The rate had leveled off earlier in the year.)

Rising house values and prosperity normally enhance the comfort level for homeowners. But over this boom decade, the average American homeowner actually lost 2 percent of the equity in the family manse. There are two reasons, according to a study done for the Consumer Federation of America. One is that people are making lower downpayments when they buy a house. The other is that they've taken out big home-equity loans.

The news media in Florida may work on a tan obsessing on the presidential schism. But to someone muttering in the December gloom of a light-deprived New England, the economy seems a weightier topic. If these economic trends continue, a cold wind will blow on whomever gets inaugurated.

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