August 29, 2001

Will It Get Worse?

The US economy has yet to sink into an "official" recession of two consecutive quarters of negative growth. Most economists had expected the first quarter of negative growth to appear in the just-ended second quarter, but today's revised numbers indicate that the GDP managed to stay positive -- barely.

That's not exactly a reason to celebrate - the GDP grew by a paltry 0.2% (revised downward from an earlier reported 0.7%), according to the Commerce Department. It's the GDP's worst showing since a 0.1% decline in the first quarter of 1993. And the biggest reason for GDP falling to this level is because companies cut back on investments in plants and equipment due to dismal profits and weak sales. Also contributing is a fall off in exports in the second quarter, as US companies had a harder time selling their goods overseas.

These trends are going to continue into the third quarter, when companies will also have wavering consumer spending to deal with as well. An upswing in layoffs squashed consumer confidence in July, and many retailers are expecting a horrible back-to-school shopping season. Consumers - who account for 2/3 of the GDP - will tighten their purse strings and slam shut their wallets even more in the months ahead.

The worst isn't over yet for the economy - or for stocks. Judging by today's reaction, investors agree. But the market is fickle, so watch out for any upcoming bear market rallies that may look inviting - don't get fooled.

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