State of the Economy
Economy's Vital Signs Weaken
Price, Confidence News Sends Stocks Plunging
By Steven Pearlstein
Washington Post Staff Writer
Saturday, February 17, 2001; Page A01
A week that began with hints of optimism about the economy from the Federal Reserve chairman ended yesterday with a rout of tech stocks, hints of inflation and a downbeat report on consumer confidence.
It added up to a picture of an economy that remains poised perilously on the edge of a recession, with consumers continuing to spend even as businesses lay off employees and cut back on investment in the face of rapidly falling profits.
"It's certainly hard to tell a consistent story," said William Dudley, the chief U.S. economist at Goldman Sachs Group, "but it's hard to say that we've hit bottom yet."
That was certainly the conclusion yesterday on Wall Street, where investors were still absorbing announcements of layoffs, flat sales and disappointing earnings at two stars of the high-tech economy, Nortel Networks and Dell Computer. At the close, the technology-rich Nasdaq composite index was down 5 percent, or 127.53 points, while the blue-chip Dow Jones industrial average gave up 91.20 points, just shy of 1 percent. Caught in the downdraft were not only Nortel and Dell but most of the nation's biggest tech companies: IBM, Microsoft, Hewlett-Packard, Intel, Cisco Systems and Corning. [Story, Page E2.]
"Bad news is feeding into a demoralized market and it is dragging down stocks in a very determined way," Charles Pradilla, chief investment strategist for SG Cowen Securities, said as trading ended for the day.
"There is really no catalyst now to get the market moving up again," said Jeffrey Applegate, chief strategist at Lehman Brothers. "As long as there is no clear visibility about corporate profits, the market will be unable to find its footing."
The tech sell-off capped a two-week reversal for the stock market that has wiped out virtually all the gains made during its January rally, which was sparked by the Federal Reserve's decision to cut interest rates in an effort to stem the economy's slide.
Since then, data showing a strong rebound in retail sales and continued strength in the housing market during January gave hope that the economy's sharp slowdown might be coming to an end. That view was embraced by Fed Chairman Alan Greenspan in an appearance Tuesday on Capitol Hill, where he forecast a healthy rebound by summer once the economy had worked off a temporary excess of unsold inventory of cars and other goods.
Hopes for a quick turnaround were set back yesterday by government reports for January that the manufacturing sector continued to shrink even as producer prices jumped 1.1 percent, raising the specter of economic stagnation and inflation. [Story, Page E1]
But more troubling was a preliminary report from the University of Michigan that its consumer confidence index had fallen sharply in February for the third month running, to about the same level it was at at the onset of the last recession in July 1990. Roughly half of those questioned said they intended to put off a major purchase, citing recent layoffs and concerns about their own job prospects.
"Consumers remain very worried about the economy slipping into recession," said Richard Curtin, manager of the Michigan study, noting that the index of economic expectations had fallen from a high of 108.6 last year to 77.6 in February. "I think it is too early to discern a bottom in consumer sentiment or consumer spending."
Other analysts noted that with consumers jittery and businesses cutting back sharply on their investments on new plant and equipment -- a key contributor to the 1990s economic boom -- the prospects of a quick and sharp rebound are slim.
"I simply don't believe this will be a short, fleeting flirtation with recession followed by a speedy recovery," said Allen Sinai of Decision Economics Inc., a Boston-based financial advisory firm. "The problems we have are much deeper than that. It's doubtful the economy will be going anywhere for some time."
Dudley at Goldman Sachs even wondered aloud yesterday whether even Greenspan really believed in the rosy scenario he painted for the Senate Budget Committee this week. Dudley suggested that the venerable Fed chairman may have been trying to use his considerable prestige to buck up consumer confidence and talk the economy out of recession.
Out in Chicago, economist David Hale of Zurich Financial Services said yesterday that the data now painted a muddy picture of an economy in which consumers continued to plod along, manufacturing was in full-dress recession while the technology sector was reeling from the burstinvestment bubble.
"People should get used to the fact that this is going to be a constantly changing picture for the next few months," said Hale.
And while the stock market remains grumpy, Hale noted the strong performance of the bond market. Companies that had been unable to float new bonds in November and December were able to raise $90 billion in January -- more than any month in 2000.
But at Wells Capital Management in Minneapolis, chief investment officer James Paulsen was considerably less sanguine about both the economy and the markets.
"I think we are in for a long contraction -- not a deep one, but one that drags on for at least the rest of this year," he said. "Unfortunately, [stocks and bonds] are still priced as if a recovery is just around the corner, which makes the markets very susceptible to disappointment."
Paulsen said his downbeat assessment is tied to the technology sector, which he said twice kept the U.S. economy out of recession over the last decade -- in 1995, with the explosion of personal computer sales, then again in 1998 with the Internet boom. But this time, he said, there is no hot new product driving the technology cycle while the economy is still trying to catch up with all the machinery that has been bought but not fully utilized.
"The tech downturn has a life of its own that will take a couple of years to work off," said Paulsen. "And I don't think there is anything the Fed can do in terms of monetary policy that can speed that up."
Back on Wall Street, Byron Wein, chief investment strategist at Morgan Stanley Dean Witter, agreed. He predicted that the rest of the year in the stock market will be pretty much what it has been so far: big swings up and down that, in the end, leave prices about where they were when the year began.
Foreign investors, Wein said, have moved to the sidelines while individual investors, unsure of what to do after last year's debacle, have decided to sit tight. That has left the market, he said, in the hands of Wall Street traders who buy stocks for a day or a week or a month, hoping to take advantage of short-term trends.
"Traders are desperately trying to take advantage of every move in the market, but there are no tradable trends," said Wein. "It's been a fool's game."
© 2001 The Washington Post Company
gruß
proxi
Economy's Vital Signs Weaken
Price, Confidence News Sends Stocks Plunging
By Steven Pearlstein
Washington Post Staff Writer
Saturday, February 17, 2001; Page A01
A week that began with hints of optimism about the economy from the Federal Reserve chairman ended yesterday with a rout of tech stocks, hints of inflation and a downbeat report on consumer confidence.
It added up to a picture of an economy that remains poised perilously on the edge of a recession, with consumers continuing to spend even as businesses lay off employees and cut back on investment in the face of rapidly falling profits.
"It's certainly hard to tell a consistent story," said William Dudley, the chief U.S. economist at Goldman Sachs Group, "but it's hard to say that we've hit bottom yet."
That was certainly the conclusion yesterday on Wall Street, where investors were still absorbing announcements of layoffs, flat sales and disappointing earnings at two stars of the high-tech economy, Nortel Networks and Dell Computer. At the close, the technology-rich Nasdaq composite index was down 5 percent, or 127.53 points, while the blue-chip Dow Jones industrial average gave up 91.20 points, just shy of 1 percent. Caught in the downdraft were not only Nortel and Dell but most of the nation's biggest tech companies: IBM, Microsoft, Hewlett-Packard, Intel, Cisco Systems and Corning. [Story, Page E2.]
"Bad news is feeding into a demoralized market and it is dragging down stocks in a very determined way," Charles Pradilla, chief investment strategist for SG Cowen Securities, said as trading ended for the day.
"There is really no catalyst now to get the market moving up again," said Jeffrey Applegate, chief strategist at Lehman Brothers. "As long as there is no clear visibility about corporate profits, the market will be unable to find its footing."
The tech sell-off capped a two-week reversal for the stock market that has wiped out virtually all the gains made during its January rally, which was sparked by the Federal Reserve's decision to cut interest rates in an effort to stem the economy's slide.
Since then, data showing a strong rebound in retail sales and continued strength in the housing market during January gave hope that the economy's sharp slowdown might be coming to an end. That view was embraced by Fed Chairman Alan Greenspan in an appearance Tuesday on Capitol Hill, where he forecast a healthy rebound by summer once the economy had worked off a temporary excess of unsold inventory of cars and other goods.
Hopes for a quick turnaround were set back yesterday by government reports for January that the manufacturing sector continued to shrink even as producer prices jumped 1.1 percent, raising the specter of economic stagnation and inflation. [Story, Page E1]
But more troubling was a preliminary report from the University of Michigan that its consumer confidence index had fallen sharply in February for the third month running, to about the same level it was at at the onset of the last recession in July 1990. Roughly half of those questioned said they intended to put off a major purchase, citing recent layoffs and concerns about their own job prospects.
"Consumers remain very worried about the economy slipping into recession," said Richard Curtin, manager of the Michigan study, noting that the index of economic expectations had fallen from a high of 108.6 last year to 77.6 in February. "I think it is too early to discern a bottom in consumer sentiment or consumer spending."
Other analysts noted that with consumers jittery and businesses cutting back sharply on their investments on new plant and equipment -- a key contributor to the 1990s economic boom -- the prospects of a quick and sharp rebound are slim.
"I simply don't believe this will be a short, fleeting flirtation with recession followed by a speedy recovery," said Allen Sinai of Decision Economics Inc., a Boston-based financial advisory firm. "The problems we have are much deeper than that. It's doubtful the economy will be going anywhere for some time."
Dudley at Goldman Sachs even wondered aloud yesterday whether even Greenspan really believed in the rosy scenario he painted for the Senate Budget Committee this week. Dudley suggested that the venerable Fed chairman may have been trying to use his considerable prestige to buck up consumer confidence and talk the economy out of recession.
Out in Chicago, economist David Hale of Zurich Financial Services said yesterday that the data now painted a muddy picture of an economy in which consumers continued to plod along, manufacturing was in full-dress recession while the technology sector was reeling from the burstinvestment bubble.
"People should get used to the fact that this is going to be a constantly changing picture for the next few months," said Hale.
And while the stock market remains grumpy, Hale noted the strong performance of the bond market. Companies that had been unable to float new bonds in November and December were able to raise $90 billion in January -- more than any month in 2000.
But at Wells Capital Management in Minneapolis, chief investment officer James Paulsen was considerably less sanguine about both the economy and the markets.
"I think we are in for a long contraction -- not a deep one, but one that drags on for at least the rest of this year," he said. "Unfortunately, [stocks and bonds] are still priced as if a recovery is just around the corner, which makes the markets very susceptible to disappointment."
Paulsen said his downbeat assessment is tied to the technology sector, which he said twice kept the U.S. economy out of recession over the last decade -- in 1995, with the explosion of personal computer sales, then again in 1998 with the Internet boom. But this time, he said, there is no hot new product driving the technology cycle while the economy is still trying to catch up with all the machinery that has been bought but not fully utilized.
"The tech downturn has a life of its own that will take a couple of years to work off," said Paulsen. "And I don't think there is anything the Fed can do in terms of monetary policy that can speed that up."
Back on Wall Street, Byron Wein, chief investment strategist at Morgan Stanley Dean Witter, agreed. He predicted that the rest of the year in the stock market will be pretty much what it has been so far: big swings up and down that, in the end, leave prices about where they were when the year began.
Foreign investors, Wein said, have moved to the sidelines while individual investors, unsure of what to do after last year's debacle, have decided to sit tight. That has left the market, he said, in the hands of Wall Street traders who buy stocks for a day or a week or a month, hoping to take advantage of short-term trends.
"Traders are desperately trying to take advantage of every move in the market, but there are no tradable trends," said Wein. "It's been a fool's game."
© 2001 The Washington Post Company
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proxi
