- The Washington Times - Saturday, August 3, 2002

Evidence that the economy is stagnating or in decline weighed on stocks yesterday, helping to send the Dow Jones Industrial Average down 193 points.

For consumers, the job outlook remained clouded as unemployment stayed at 5.9 percent last month and businesses slashed work hours while curtailing new hiring, the Labor Department reported.

The dramatic cut in the workweek comparable in magnitude to the one after the September 11 terrorist attacks suggests that income growth stalled during the month after posting its largest gain in two years of 0.6 percent during June.

President Bush, before departing for Kennebunkport, Maine, took heart that the unemployment rate held steady. But, he noted, "We've got a lot of work to do to make sure people find work," and said the trade-opening bill passed this week will help on that front.

Richard Berner, economist with Morgan Stanley, said the jobs report, and news of a sudden setback in manufacturing activity and orders, provides evidence that the rout in the stock market last month took a toll on the economy, as many had feared.

"The crisis of confidence on Wall Street has spilled into Main Street," he said. "The economy is clearly running at stall speed."

Yesterday's 2.3 percent drop in the Dow to 8,313, fueled in part by the weak jobs report, comes on top of a 230-point loss on Thursday. In the past two days, all the major stock indexes retraced some of the gains they made in the prior week after hitting five-year lows.

Broader stock indicators also fell. The Standard & Poor's 500 index was down 20.42, or 2.3 percent, at 864.24, and the Nasdaq Composite Index slipped 32.08, or 2.5 percent, to 1,247.92.

The markets ended the week mixed. The Dow advanced 0.6 percent, while the Nasdaq fell 1.1 percent and the S&P rose 1.3 percent. The stock market's woes reflect uncertainty and growing worries about the economy the same thing that prompted businesses to add only 6,000 jobs last month after taking on 66,000 new workers in June, economists said.

"Uncertainty is the enemy of growth," Mr. Berner said.

The clouds gathering over the economy have snuffed out the momentum the recovery exhibited earlier this year and now are leaving it vulnerable to shocks and setbacks, he said.

But while another terrorist attack or war breaking out in the Middle East could pose just such a shock to the economy, he said, "it would take a big one to push us over the edge. That's because rebounding income and profits growth are cushions of strength for consumers and businesses."

Joel Naroff of Naroff Economic Advisers said the economy took a U-turn last month and is now slowing, rather than accelerating as it did earlier in this year's recovery.

"What stopped the solid economic momentum in its tracks? The only explanation is the equity markets," he said.

Two sectors that added jobs even during the recession construction and state and local government turned sharply negative last month, eliminating 30,000 and 16,000 jobs, respectively.

Budget cutting by municipalities will only increase in coming months as governments scramble to stanch the red ink, while the outlook for new construction outside of housing remains dark.

But the "really worrisome" development last month, Mr. Naroff said, was the across-the-board cut in hours by businesses one of the largest ever that was not related to weather disruptions.

The cut took a chunk out of consumer incomes and industrial production, which was just starting to recover from a deep recession, he said.

Those setbacks risk setting off a dangerous downward spiral of still-slower growth in consumer incomes and spending that will make businesses even more reluctant to hire in coming months, he said.

Debbie Johnson, economist with Prudential Securities, agreed that new hiring will remain slow, but she expects steady spending by consumers to keep pulling the economy out of its slump.

With mortgage rates at record lows, the latest wave of refinancings is putting more money in consumers' pockets, on top of their sizable income gains during June, she said. That showed in the healthy growth in June spending by consumers and an increase in auto sales even during the depressed month of July.

Job opportunities continue to increase in areas such as health care, education, retailing and because of the refinancings and strong housing market mortgage banking, though job cuts still are the rule in manufacturing, construction and temporary employment.

"We're not ready to give up on the consumer," Ms. Johnson said.

Robert Parry, the president of the Federal Reserve's San Francisco bank, yesterday said that growth could pick up this quarter because of an acceleration of exports spurred by the declining dollar, which makes U.S.-made products more competitive.

Imports should decline for the same reason, he said.

While growth has been weaker than the Fed expected, the economy remains in a "modest expansion," he said.

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