Reality Intrudes on Euphoria
-- June 13, 2003

After the end of the Iraq war, consumers and stock investors turned euphoric, thinking that suddenly all our economic problems were over. But now reality is creeping in. The June drop in consumer confidence was the biggest in eight months. With unemployment at an eight-year high of 6.1% and the number of people collecting unemployment benefits at a two-decade high, consumers across the country are afraid of losing their jobs, if they haven't been laid off already.

That fear should keep pushing consumer confidence down for some time to come. And with sentiment weak, people are sitting on their wallets. That's why retail sales on average dipped 0.2% in April and May. And with household spending accounting for more than 70% of economic output, weak retail sales mean a weak economy. It's no wonder that gross domestic product grew only 1.9% annualized last quarter.

On top of all that, the economy looks to be headed for a severe bout of deflation. Today, the government reported that producer prices fell 0.3% in May, extending April's 1.9% plunge. Falling prices crimp corporate profits and make consumer, corporate and government debt more expensive to pay back.

There is no reason for the stock market to be rising in the face of all this bad news. And indeed share prices took a tumble today. That move should prove to be only the beginning of a long-term drop that brings the stock market in line with economic reality.

related article: Consumer Sentiment Sours in June