officials have long tried to draw a distinction between the economy and hoi polloi of the stock market. But the latest economic reports, gross domestic product for the second quarter and the Chicago purchasing managers index for July, suggest the recent slide in equities may be hurting more than 401(k)s.
"To a degree, the economy is hostage to the market," said Ethan Harris, an economist at Lehman Brothers. "It may take months to gauge how the drop in stocks has affected the consumer."
GDP grew at a 1.1% annual clip in the second quarter, the Commerce Department said. That compares to first quarter growth of 5%, which was revised down from previous estimates of 6.1%.
Separately, a survey of Midwest manufacturing activity came in at its worst levels since January. The Chicago PMI was 51.5, down from 58.2 in June and below consensus of 56.5. Nevertheless, the headline number was above 50, indicating continued expansion in the factory sector.
Wednesday's data follow weakness in durable goods orders, existing home sales, and consumer confidence statistics. And the reports come at the end of a month, in which the
Dow Jones Industrial Average
lost 7.3%, the
shed 11%, and the
"The Federal Reserve is on high alert for damage to the economy from financial markets," said Harris, who thinks that the Central Bank could lower interest rates again if the economy falters. In his most recent address, Chairman Greenspan said the economy was on its way to a full recovery, however.
On a positive note, the data that matter most to the Federal Reserve, employment numbers, industrial production, the national purchasing managers index, and nonauto retail sales, have held steady.
And while the economy grew less than expected in the second quarter, (experts were forecasting 2.3% GDP growth,) few seem worried about it falling back into recession.
"The report shows how difficult it will be to get a double dip," said Christopher Low, an economist at First Tennessee Capital Markets. "With inventories so lean, retailers will have to continue ordering to keep up with the pace of sales. That was definitely not the case in the recession of last year."
Notably, software spending was up 10.6% in the second quarter, its biggest gain in more than two years. "It is the first indication of life in capital spending," said Low. "It definitely helps the economy."
Companies are not yet spending on new nonresidential structures, such as new plants. But they have shown a willingness to invest in software and equipment makers that enhance productivity.
GDP was revised to a 0.8% decline in the first three quarters of 2001 from estimates of a 0.1% advance. Corporate profits were revised down for 1999, 2000, and 2001, the Commerce Department said. "The revision alters our perception of values," said Low. "Trailing P/Es may be higher than we thought."
Still, with a possible comeback in the stock market, Low is optimistic about an economic recovery. "It is safe to assume this was a low," he said, with regard to the Chicago purchasing managers index.