Stock Rally Masks Economic Woes
-- June 20, 2003

The stock market may be in a powerful rally, but a look at the latest data shows no reason to expect a pickup from the first quarter's paltry economic growth rate of 1.9%. At some point soon, investors are going to realize the economy is in a heap of trouble. And when they do, the stock market rally will reverse in a hurry.

Just look at some of the latest economic numbers. Industrial production rose by a paltry 0.1% in May, while capacity utilization was unchanged at 74.3%. That's the weakest level of usage in 20 years. With the manufacturing sector accounting for about 15% of economic output, that's a bad omen.

The latest jobless figures are worrisome too. The number of new jobless claims registered 421,000 last week, the 18th straight week that claims surpassed 400,000, the threshold for a contracting labor market. As US businesses export more jobs overseas to cheaper labor markets, this trend is expected to continue for some time.

With so many people either out of work or afraid of losing their jobs, consumers are reluctant to open their purse strings. So businesses are cutting prices to entice spenders, and that is raising the danger of a vicious wave of deflation. In fact, producer prices are already falling -- down 0.3% in May.

The bad news continues to mount when it comes to the US economy. Bottom line: It's just a matter of time before investors wake up to reality and head for the exits on Wall Street.

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