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April 6, 2001

Labor Market Starts To Buckle

The low unemployment rate is widely regarded as the reason that consumers continue to spend even in the face of economic slowdown and stock market volatility. But that is starting to change. The unemployment rate edged up to 4.3% in March, its highest level in more than 18 months. Now, recession is looming and increased layoffs are on the horizon.

Consumers are already mired in debt -- last year, there were 1.2 million personal bankruptcies, and this year the number is expected to rise. And last year, household net worth declined by 2% -- the first time it had gone down in 55 years. Reason: losses in the stock market. Most Americans jumped on the stock market bandwagon in the heady days of the bull market in the hopes of hitting it big and retiring early. But now they've lost more than half of their investment and waived goodbye to their nest egg.

Not only can't they retire early, but the softening job market and severe economic slowdown will make it harder for them to keep the jobs they've got. Payrolls took their biggest tumble in 10 years. For the first time in seven months, more positions were eliminated than created.

Faced with unemployment and nothing in savings or stocks, consumers will be forced to tighten their belts and put the brakes on spending. So, companies will see their bottom line weaken because of less demand and lower sales. At the same time, wages are rising, which further erodes company profits. And lower profits mean missed earnings, and that means even more damage to stock prices.

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