May 4, 2001

Increased Unemployment Will Shake Consumer Confidence
And Fed Rate Cut Won't Be The Cure-All

Not since February 1991, when the economy was mired in recession, have so many jobs disappeared in a single month. Today, the economy is circling the drain. And with news of increasing unemployment, it won't be long before it plunges head first into a deep recession.

And still, the stock market continues to rally. Investors are hanging all of their hopes on Fed rate cuts to rescue the economy from recession. That's a big mistake. There are several reasons why a Fed rate cut, or even a series of Fed rate cuts, isn't the cure all. Most important is that with the ever-increasing number of layoffs consumers won't be induced to buy even if the Fed lowers the interest rate. Americans are already up to their eyeballs in debt. Defaults and late payments of mortgage and credit card bills have skyrocketed. And now higher oil and energy prices are taking a big bite out of their wallets!

Until now, there has been a bit of a disconnect between consumer confidence and consumer spending. But the impact of layoffs and high energy prices is beginning to reverberate through the economy. Consumer spending on autos, appliances, and other major purchases has fallen, and there is not much reason to believe that home sales will continue to be strong as more and more Americans lose their jobs.

Plus, even though companies improve their bottom lines with large layoffs, the health of the economy declines as a result of decreased consumer spending that that follows massive layoffs. In reality, these companies are shooting themselves in the foot. Layoffs beget reduced spending, and reduced spending begets lower profits for businesses. And investors aren't willing to put up with disappointing earnings for much longer. Especially when there is not much hope for recovery in the near future.

The unemployment report wasn't enough to knock the breath out of the rally, but it won't be long before investors wake up and smell the recession.

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