- The Washington Times - Friday, April 15, 2005

Fear that the economy is headed into a major slowdown drove the Dow Jones Industrial Average down nearly 200 points yesterday, prompted by signs that high energy prices are hurting consumers and businesses.

International Business Machines became the latest blue-chip American corporation to report diminishing growth and earnings. Its announcement came on the heels of reports showing a slump in consumer confidence caused by high energy prices, and a falloff in manufacturing output last month.

The Dow’s 191-point fall to 10,087.51 — its biggest decline in almost two years — caps a nearly 4 percent drop this week and a 853-point drop since March 4, when oil and gasoline prices started to ascend toward record highs that are now tormenting consumers.

Yesterday’s steep losses brought the Dow and other major stock indexes to new lows for the year, and triggered a drubbing on stock exchanges worldwide. The disappointing news from IBM follows distressing news from General Motors, Sony, Samsung and other leading corporations in the past week.

?The significance of IBM is more than just technology. In the eyes of the market, it’s indicative of the slowing economy,? said Christopher Sheldon, an investment manager at Mellon Private Wealth Management.

Technology stocks, taking a cue from IBM, led the market downward. An improved profit outlook from General Electric Co. and better-than-expected earnings from Citigroup Inc. failed to reverse the gloomy sentiment.

The possibility of a major slowdown — going beyond the brief ?soft patch? in the economy induced by high energy prices last year — worries investors because the United States recently has resumed its role as the growth engine of the world economy.

Growth in Europe and Japan already was down as a result of high energy prices and weak exports — both of which owe in part to a large decline in the value of the U.S. dollar in recent years.

?High and rising energy prices are the main threat to growth, but weakness abroad is also a risk,? said Richard Berner, chief U.S. economist at Morgan Stanley.

In his view, the lull in business activity most likely is temporary, as suggested by a survey of companies this month by Morgan Stanley.

?Advance bookings remained well above the 50 percent threshold, auguring healthy future growth,? he said. ?Rising energy prices could have squeezed margins for some and thus delayed [capital spending] and hiring plans. But more than half of reporting industry groups were able to pass such costs on to customers.?

But while businesses are having greater success passing on high energy costs to consumers, the rapidly rising prices at the gas pump and in the malls are thwarting consumers and eating into purchasing power.

The University of Michigan said its consumer sentiment index declined this month as a result. Consumers also may be reacting to a slowdown in hiring last month that some economists also are attributing to the resurgence of energy prices.

?There is little doubt that the most recent spike in oil prices is taking a toll on consumer spending and business investment,? said John Silvia, chief economist at Wachovia Securities, noting a marked falloff in retail sales last month.

While premium crude prices retreated this week to little above $50 a barrel — in part because of the prospect of declining demand — any rebound in prices to records near $60 would further jeopardize growth, he said.

But the mild letup in growth seen thus far ?is nothing to get too worried about,? he said. ?The past two economic expansions both hit a soft patch around the middle of the decade. In both instances, the modest pullback in growth helped to fend off inflation and moderated the rise in interest rates.?

Energy Secretary Samuel W. Bodman said the problem with chronically high energy prices ?has been years in the making and is going to be years in the solving.?

He said consumers will have to resolve the strain in their budgets by using energy more efficiently and adopting energy-saving technologies.

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