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News
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Watch out for the double-dip
The economy has hit an air pocket and some fear the worst.
August 2, 2002: 6:48 PM EDT
By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - It isn't just the stock market that's gotten hammered lately -- the economy's taken a major hit. A double-dip recession, until recently something that seemed farfetched, is now looking like a real possibility.

In recent days investors have been served up with platefuls of bad economic news. Report after report has come in weaker than forecasters thought. Recent GDP reports got revised sharply lower, indicating the economy was weaker than thought. Construction spending slipped.

Durable goods orders showed a steep decline -- and then got revised lower still. Factory orders fell. The Institute of Supply Management's index of manufacturing activity had a big drop. Now the worry is that the economic recovery that began this year is over, and we are dipping again toward recession

  graphic  Econ news  
  
8/2: New jobs growth disappoints
8/2: Factory orders fall
8/1: Manufacturing sector slips
7/31: GDP revised down
7/30: Consumer confidence plunges
7/25: Durable goods plunge
  

"The economy has hit an air pocket, at minimum," said Bill Sterling, chief investment officer for Trilogy Advisors.

More than anything what the numbers show is a sharp pulling back by businesses even as consumer spending held up decently. What happened?

Stock shock

The answer could well lie in stocks' deterioration. CEOs are intensely aware of stock price movements -- particularly their own companies'. Though the old saw is that the stock market has forecast eight of the last 12 recessions, many people believe deeply in the predictive power of the market.

"What happened is the stock market began to move lower not because of economic fundamentals, but because of a setback in investor confidence," said Morgan Stanley economist Bill Sullivan. "This huge evisceration of wealth is being seen as a leading indicator of the economy. Against that backdrop, CEO perceptions of the economy's potential have worsened."

The guts of the economic numbers indicate that this is happening. Take June durable goods orders. (Durable goods are things that are designed to last a while -- everything from copper wire to the big fans that push smoke up a smokestack.) That they were weak and then got revised lower suggests that a lot of orders got cancelled. Meanwhile, what was the reason for the downdraft in the Institute of Supply Management's index for July? A big slowdown in new orders. Meanwhile, cash commodity prices have slid, suggesting falling demand.

"The fact is orders just hit a wall in June and July," said Salomon Smith Barney economist Steven Wieting.

 
Economic commentary from Kathleen Hays

The batch of bad news has sent economists scurrying to revise down their expectations on the economy. Several now say the odds are high for the Federal Reserve to cut the funds rate -- at 1.75 percent, already at its lowest level in 40 years -- lower still. Lehman Brothers now thinks that there's a one-in-two chance the Fed will cut rates.

Banc of America Securities chief economist Mickey Levy, who in a Wall Street Journal op-ed a little over a month ago argued forcefully that the Fed should raise rates, now thinks there's a 35 percent chance rates will get cut. Meantime Goldman Sachs economists said Friday they think the Fed will have to cut the funds rate down to 1 percent by the end of the year.

Most economists think the economy will muddle through, but the ranks of those who now believe it is slipping back into recession is growing. Richard Berner, Morgan Stanley's chief U.S. economist, said Friday that economic growth has weakened to the point where a shock could send it into a double dip. (Morgan Stanley's chief economist, Steve Roach, has long been a lonely proponent of the double dip.)

Paul Kasriel, of Northern Trust, had thought that the Fed's easy monetary policy would lead to a flare-up in business activity and inflation, rate hikes, and then a fresh economic downturn. Now he thinks the flareup won't happen, just the downturn. He thinks all the economists who still believe the economy will continue to recover have got it wrong -- and will change their views once a renewed recession is clear to just about everyone else.

"We've got a heckuva of a great profession here," he said. "We're one of the best lagging indicators in the world."

Feeding through

The thing that made last year's dip mild was that the U.S. consumer held up well. But it's hard to imagine that happening in the face of a fresh downturn.

The worrisome part of the employment report on Friday was that the economy added a paltry 6,000 jobs in July. With companies on the ropes, the prospect of a new round of layoffs looms. That would make people less willing to spend.

Then there's the stock market, which has lost more than $7 trillion in capitalization since it peaked. Household wealth declined, for the first time in U.S. history, in 2000. It dropped again in 2001 and looks like it could fall again this year. Expectations that the market would come back, bailing out retirement plans, have evaporated. Already Americans are becoming more conservative in their spending habits. Data released Friday showed that the savings rate ticked up to 4.2 percent in June. A year earlier it was at 1.7 percent.

Morgan Stanley's Sullivan thinks that Thursday's earnings report from Disney, which said that bookings at its vacation theme parks are off 10 percent in the current quarter from a year earlier, tells you something.

"When Americans deny their children going to see Mickey and Minnie," he said, "that means something."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.