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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | AUGUST 31, 2001  ECONOMIC BRIEF • From S&P No Wonder Consumers Are Buckling The economy's last pillar of strength is starting to weaken under the weight of rising joblessness and bankruptcy filings
Chipping away at the foundation of robust consumer spending are rising bankruptcy filings, the weakest quarterly economic growth in more than eight years, worsening labor trends, and a deepening of the technology downturn in the West. The latest piece of evidence: The Commerce Dept.'s Aug. 30 report that consumer spending in July grew at the slowest pace in nine months, even as disposable incomes were boosted by refund checks handed out under President Bush's tax-cut plan. That last bit of news did little to cheer jittery markets: The Dow Jones industrial average closed below the psychologically significant 10,000 level for the first time since April, at 9919.58, while the Nasdaq and S&P Index also dropped. RECORD-BREAKING PACE. Data provided by the Administrative Office of the U.S. Courts found that bankruptcy filings nationwide in the second quarter rose more than 25%, led by California. In the three-month period, 400,394 claims were filed -- a new quarterly record -- putting 2001 on pace to eclipse the record 1998 filings of 1.4 million, according to the American Bankruptcy Institute. Indeed, the past four years has seen a shift to personal bankruptcies from the corporate variety. With initial state jobless claims back on the upswing, high personal debt levels, and forthcoming changes in bankruptcy laws, it appears the forces of destructive creation are in full swing. Yes, you heard it right. This vicious cycle is turning Schumpeter's theory of the positive forces of capitalism's creative destruction on its head. Combined with such personal pain, the psychological impact of second-quarter gross domestic product growth being revised down to 0.2% raises a red flag. Though such a weak second-quarter number sets up the third quarter for some relative improvement, it also heightens the recession vigil. Look at the mood in the equity markets. SERVICES, TOO? Economists weren't surprised by the downward GDP revision. But the swelling ranks of the unemployed won't be comforted by the ongoing negative newspaper headlines. Initial claims for state unemployment benefits have begun to revert to poor form. Indeed, jobless claims hit 399,000 for the week ending Aug. 25 and were revised significantly higher to 400,000 the week prior. A more accurate measure of layoff trends -- the rolling four-week average of jobless claims -- hit the highest level since 1992. And anecdotally, at least, global job losses have shown no evidence of slowing. A recent survey by global temporary-help agency Manpower revealed that hiring plans were cut in half from a year ago, a trend that may be spreading to the service sector. Moreover, the tech sector shows scant signs of a recovery in business capital spending. The San Francisco's Fed's latest roundup of economic developments in the Western region warned that the Fed's 12th District -- the nation's engine of growth for much of the past decade -- "slowed significantly in recent months," thanks to ongoing weakness in the tech industries. As measured by durable goods orders placed in July, orders for tech products fell 4.4% nationwide, led by a 26% decline in semiconductor orders. This is leading to plunging regional jobs growth and rising commercial and industrial vacancy rates -- a 54% quarterly increase in San Francisco at the extreme. PLEASE, MR. GREENSPAN. A short-term spending boost from President Bush's tax rebate will be welcome, but it may be too little, too late. The most likely scenario is a peak in rebate-related consumption emerging in August data, which will be released in September. But it could be downhill again from there. All eyes once again are looking to the Fed for help. Financial futures have priced in an 80% probability that the Fed will keep cutting when its Open Market Committee meets on Oct. 2. Another cut in short-term rates would be the central bank's eighth so far this year, part of its most aggressive easing campaign in two decades. In the minutes of the FOMC's June meeting were signs that the Fed is nearing completion of its stimulus campaign. But its next move, while widely expected to be another quarter-point cut -- which is what S&P expects -- may not be its last if the economy shows no signs of improving between now and then.  By Michael Wallace, senior economist, Standard & Poor's Global Markets Edited by Beth Belton Any advice, analysis, or recommendations contained in articles labeled "Advice from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of Business Week Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis or recommendations that are published by Standard & Poor's. Standard & Poor's and Business Week Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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