- The Washington Times - Friday, September 7, 2001

Stocks fell on a raft of news yesterday, from flagging sales at Motorola to the Bush administration's pursuit of business changes at Microsoft and signs that the manufacturing recession is spreading to services.
The Dow Jones Industrial Average fell 192 points to 9,841 in a broad drubbing that took the greatest toll on technology stocks. The Nasdaq Composite Index lost another 53 points, or 3 percent, to end at 1,706 not far above its lowest close of the year.
Computer-chip and cell-phone maker Motorola led the parade of unwelcome news, saying it expects sales to be flat this summer and announcing another 2,000 job cuts. Retailers such as the Gap and Pier 1 Imports, which had hoped to gain from this summer's tax rebates, also disappointed the market by reporting slower sales instead.
Same-store sales last month were mixed, with discounters like Wal-Mart reporting the best gains but tepid sales growth overall despite a massive dose of federal tax rebates and tax-free-shopping holidays in many states.
Adding to the market's woes was a report that the vast service sector of the U.S. economy contracted for a fourth time in the past five months, in a sign that the economic downturn is no longer confined to manufacturing.
"That is not good news for the economy," said Joel Naroff of Naroff Economic Advisers. "Non-manufacturing business is the bulk of the economy and it now is faltering."
Service firms surveyed in yesterday's report by the National Association of Purchasing Management said they slashed payrolls after holding out against job cuts for months, helping to drive the association's index to a record low.
Adding to the sour mood on Wall Street was a seemingly positive announcement from the Justice Department that it would not pursue a breakup of Microsoft Corp.
The development was largely expected, so investors focused instead on the Bush administration's decision to keep pursuing "behavioral remedies" sought by the Clinton administration to prevent antitrust abuses.
Microsoft has been one of the few tech companies that has pleased Wall Street this year by meeting projections for growing sales and profits. Many investors fear business changes sought by the Justice Department and state attorneys general will hobble Microsoft or delay the release of its Windows XP operating system this fall.
The new operating system is expected to be a catalyst for greater technology spending by businesses, since many will have to upgrade their computer hardware systems with more powerful equipment to run the software. That would help to cure one of the economy's biggest problems right now a collapse in business capital spending.
Robert A. Levy of the Cato Institute said the antitrust suit continues to cast a cloud over Microsoft.
"The government wants to move ahead aggressively and quickly to restrict Microsoft's behavior and, maybe, to prevent Windows XP from establishing a major toehold in the market," he said.
Mike Green, managing partner at Benham & Green Capital Management LLC, said yesterday's reaction was overdone, however, and Microsoft was mostly a victim of the bearish mood on Wall Street.
"This is very, very good news," he said. "This is an about-face by the government."
Mr. Green doesn't expect the Justice Department to impose restrictions that will "hamstring" the company.
What is really behind the downturn on Wall Street, some analysts say, is the poor prospects for a return of robust economic growth and big profits like those businesses enjoyed in the 1990s.
During the heydays of the 1990s, businesses were able to report double-digit gains in profits even as they held the line on prices and drove unemployment to 30-year lows. That was all made possible by the rapid pace of economic growth and productivity gains.
Expectations that the excellent performance of the 1990s would continue drove the prices of technology and other stocks sky-high. In the past year they did not meet those high expectations, leading to dramatic drops in many stocks. But some analysts say the stocks are still overpriced.
That is because few economists expect a return of 1990s-style robust growth, even if the economy escapes a recession this year. Most expect growth to remain lackluster in the coming year, ranging from 1.5 percent to 3 percent.
Gail Fosler, chief economist with the Conference Board, expects growth to rebound to a relatively healthy 3.2 percent in 2002, but even that will not be of much aid to Wall Street.
"Business profits continue to erode" because labor costs and inflation remain relatively high despite this year's deep economic slowdown, she said. "The reacceleration in economic growth will do little to fundamentally improve the corporate cost or profitability picture."
The only way for businesses to boost profits and cut their costs is through further layoffs and restructurings, she said. "The true recession, therefore, is ahead."

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