July 17, 2001

Plunging Profits and Economy Will Sink Stocks

The economy continues to sink to historic lows, and it won't be long before the stock market follows suit. Industrial production declined again in June, pushing the manufacturing sector into doldrums not encountered since 1982. And according to the Fed, the drop-off in production occurred across the board and included computer chips, telecommunications equipment, trucks, consumer electronics, appliances, and furniture. The slowdown in manufacturing was even more widespread than it was in May. That isn't the picture of an economy showing signs of recovery.

Plus, the latest data shows inventory levels are unchanged from the previous month, which means the same number of goods still sit on store and factory shelves. That tells us businesses aren't ordering new supplies or equipment because customers aren't buying.

Economic activity generated by corporate America, which accounts for one-third of the US economy, is already impaired. So far during this earnings season, we've seen company after company report plunging profits -- even if they managed to meet already-lowered Wall Street estimates.

Taken together, these developments are a clear sign that struggling companies won't start hiring workers back any time soon. And that could spell even more disaster for the economy and the stock market. Consumer spending quickly tapered off in June as layoffs multiplied. And if that situation doesn't reverse itself, the slowdown will spread to the remaining two-thirds of economic activity, as consumers stop spending and investing.

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