- The Washington Times - Saturday, July 7, 2001

The Dow Jones Industrial Average took a 227-point tumble yesterday after a bleak unemployment report and more profit warnings from top technology companies put traders in a pessimistic mood.
Employers cut 114,000 jobs last month, pushing up job losses during the spring quarter to more than a quarter-million and raising the unemployment rate to 4.5 percent, the Labor Department reported.
Also yesterday, abysmal earnings were reported at Advanced Micro Devices, a major semiconductor manufacturer, and EMC Corp., an Internet storage provider. The Dow lost 2.2 percent to end at 10,252.
Yesterday's dour economic news helped trigger a stock market sell-off despite widespread predictions that higher unemployment would prompt the Federal Reserve to keep cutting interest rates to keep the economy afloat.
The decline in employment is spreading from manufacturing to the broader economy — including wholesale trade, transportation and services — and is a major reason the economy remains in danger of falling into recession, analysts said.
"We are performing a high-wire act. We could easily be pushed in either direction," said Sung Won Sohn, chief economist at Wells Fargo & Co., who estimates the economy grew at a barely perceptible 0.5 percent annual rate between April and June.
The official arbiter of recessions in the United States — the National Bureau of Economic Research in Cambridge, Mass. — has been monitoring the employment report for evidence of a recession that it says might have begun this spring.
The downturn in employment since March is a tentative sign of recession, it says, but the job losses so far are nowhere near as large as the 1.9 million jobs lost during the last recession in 1990-91.
Another major indicator monitored by the research group — industrial production — has been dropping since last fall and clearly is in recession. Two other indicators the group monitors so far have not turned down, however. They are personal income and retail sales, adjusted for inflation.
Mr. Sohn is one of many economists who believe that, while the economy has been sinking rapidly this year and appears to be just barely growing now, it will recover in coming months on the strength of the Fed's aggressive interest-rate cuts and the $1.35 trillion tax cut signed by President Bush.
"The Bush tax cut has been perfect for timing," he said. "It's going to boost economic growth by one full percentage point during the second half of this year. Right now, that's terribly important."
He noted that the unemployment rate at 4.5 percent remains low by historical standards and that the job market remains tight in many areas despite the surge in layoffs. All of that helps to bolster consumer confidence and spending, which remains the principal strong point in the weak economy.
Most of the job losses, Mr. Sohn said, have been in technology, both among manufacturers of technology equipment and technology services such as software and telecommunications.
"That's the leading edge of the recession," he said. "The tech bust is substantial" and may take years to correct because a binge of technology investment during the late 1990s created a huge amount of oversupply and overcapacity in such areas as fiber optics and computers, he said.
Because the depression in technology may continue to hang over the economy for a long time to come, he said, unemployment will continue to rise and growth will remain sluggish, nowhere near the robust rates around 4 percent that prevailed when technology was booming, he said.
Another symptom of the technology bust — plummeting profits — is the culprit that has been dragging down the stock market in recent days, he said. Technology profits have fallen 50 percent from a year ago, while the earnings of nontechnology companies have declined only 5 percent.
The day's poor showing shaved 76 points or 3.7 percent off the Nasdaq Composite Index, which ended at 2,004, down 7.2 percent for the week.
"A lot of people had bought the idea that the worst was behind us. Obviously, that's not the case," said Richard Dickson, analyst at Hilliard Lyons.
John Makin, an economist with Caxton Associates in New York, says the economy is in the early stages of a "dangerous supply-side recession" that started with the bust in technology investment last year.
The drop in profits and sales is forcing businesses to cut costs, which is the reason they have laid off thousands of workers this year, he said. The accelerating loss of employment, in turn, weighs on consumers and, when combined with record levels of debt, forces them to cut spending, he said.
While the Fed's rate cuts and $50 billion of tax rebates this year will help the economy, he said, they are modest by historical standards and can by no means ensure it escapes recession.
"The Fed has more work to do," he said. "The only source of demand growth is coming from the fading strength of the U.S. consumer."

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