April 4, 2001

The Slowdown Spreads

Yesterday, we told you how the Federal Reserve of Chicago said that the chances are likely that we are in a recession right now. Today, the NAPM survey of the service sector shows that the service sector is quickly sinking toward recession. And the service sector is what drives the U.S. economy.

Most people think manufacturing is the backbone of the U.S. economy, especially since technology is now such a big part of manufacturing, but the fact is that the service sector is much larger and employs more people. It has defined the U.S. economy ever since the end of World War II. And when employment in the service sector shrinks, you can be sure that the impact on the economy will be enormous.

What's next? Well, another huge factor in America's financial health is consumer spending, which fuels two-thirds of America's economy. It's held up moderately well over the past year, but now, $5 trillion in wealth has disappeared from the stock market and Americans feel a lot poorer. As layoffs mount and fuel prices cut into household budgets, consumer spending lately shows signs of grinding to a halt.

Retail and auto sales dropped last month. And without any savings to speak of (the savings rate is a negative 0.91%) and loads of debt, consumers are going to have to rein in spending.

This, in turn, will hammer corporate earnings, which means stock prices will plunge even further and companies will have to lay off more workers -- fueling the vicious circle once again. Bottom line: We haven't seen the worst of this economic downturn yet, and quite frankly, we'll be lucky to get out of it with just a recession.

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