Two former executives of WorldCom were led away in handcuffs this morning, but the "perp-walk" effect failed to inspire stocks Thursday.

Unlike Wednesday's session, which was aided by month-end considerations, major indices were retreating in the wake of another round of disappointing economic data. Still, as reported Monday, many observers expected a retreat after a very solid and near week-long advance.

As of 2:25 p.m. EDT, the Dow Jones Industrial Average was down 2.3% to 8539.71, the S&P 500 was off 2.4% to 889.38 and the Nasdaq Composite Index was lower by 2.9% to 1289.8.

Stock proxies were also weakened by a disappointing earnings report this morning by ExxonMobil ( XOM) and Wednesday night's warning by Adobe Systems ( ADBE).

There also are ongoing concerns about financial institutions, Thursday's focus being on Citigroup ( C), which was lately down 3.2%. Chief Executive Sandy Weill canceled a previously scheduled appearance at a Merrill Lynch conference and there are concerns about what he knew and when he knew it vis a vis Jack Grubman's recommendations on AT&T ( T), among others.

Gathering Gloom

Recent reports paint an increasingly disconcerting picture about the economy. It's wrong to leap to draconian conclusions on the basis of a handful of reports, as indicators such as the Treasury yield curve continue to show the economy has positive momentum. But it's getting harder and harder for the bulls to argue the economy is as "fundamentally sound" as government officials would like us to believe.

Thursday, the Institute for Supply Management's manufacturing index fell to 50.5 in July, the lowest level since January, and down from 56.2 in June. The consensus estimate was for a much smaller drop, to 55. The components of the ISM (formerly NAPM) report were just as troubling: The new orders index tumbled 10.4, to 50.4, its lowest level since November, while the prices-paid index rose to 68.3 from 66.5.

Separately, the government reported construction spending fell 2.2% in June vs. expectations for a 0.2% rise, while May's results were revised to a drop of 2% from a dip of 0.7% originally. Also, jobless claims unexpectedly rose 20,000 to 387,000 for the week ended July 27. However, the four-week moving average is at 386,000, the lowest level in 16 months, according to Strong auto sales were also a mitigating factor in the sea of otherwise negative reports.

Combined with Wednesday's sharp downward revision to GDP and weak Chicago PMI report plus last Thursday's weak durable goods report, Thursday's data (again) don't suggest the economy is heading off a cliff or that a "double-dip" is inevitable. But it does put the optimists on the defensive.

"We have now re-established downside risk for the economy here in the summer of 2002," said William Sullivan, senior economist at Morgan Stanley. "I believe there is downside risk. It's doubtful the economy can accelerate over and above the current estimates, and seems the likely risk is we can slow."

Ease Talk

The latest batch of economic data has again ignited speculation of a possible easing by the Federal Reserve, whose rate-setting body next meets on Aug. 13. Fed fund futures are now pricing in 50% odds of an ease by the end of the year, and some money market curves were inverted this morning -- six-month yields were lower than three-month.

Still, Sullivan believes the odds of Fed ease this month is far less than 50%, although the FOMC may switch its "balance of risk" statement back to one weighted toward economic weakness.

"After going to Capitol Hill on July 16-17 with rose-colored glasses on, the chairman is not prepared to say the environment is fraught with downside risk," Sullivan said. "If I were to be critical of the chairman, I think he missed some warning signals" leading up to his testimony, including the downturn in equities and stresses in the credit markets.

Critical of Greenspan? Sacre bleu!

"He said 'everything's great,'" Sullivan recalled. "I'm not here to say he's wrong, but it's going to be difficult to achieve" the Fed's official forecast of GDP growth of 3.5% to 3.75% this year and 3.5% to 4% in 2003, he said.

Officially, Sullivan doesn't make public forecasts. Those are handled by Morgan Stanley's chief U.S. economist Richard Berner and chief economist Stephen "Double-Dip" Roach, who have been at odds for some time. Sullivan seemed to be pretty firmly in the latter's camp: The slowdown "outlook was challenged in the winter and spring, but now things suggest a curbing influence on economic activity," he said.

Friday brings the factory orders and personal income/consumption data for June as well as the all-important unemployment report for July. The consensus forecast is for nonfarm payrolls to rise by 60,000 and the unemployment rate to remain at 5.9%.

"If the payrolls are upbeat, we'll quickly forget some negative inputs," Sullivan quipped. Still, consensus forecasts will undoubtedly be subject to downward revisions, and soon.

"From a forward-looking perspective, perhaps the most important implication of the revised GDP numbers is that productivity growth was apparently much weaker than previously estimated in the last two years," said Jan Hatzius of Goldman Sachs' economics research group. "Assuming no major revisions to hours worked, we anticipate downward revisions to nonfarm labor productivity growth of about 1% in 2001 and about 0.5% in 2000."

Assuming such revisions prove accurate, average productivity for the years 1996 to 2001 -- including the peak of the "productivity miracle" -- would fall to 2.1% from 2.4%, Hatzius concluded. "Revisions of this magnitude might make our 2.25% working estimate of the productivity trend look like a bit of a stretch."

Goldman continues to forecast annualized GDP growth of 2.5% in the second half of 2002; notably, this is about 1% below the consensus.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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