An interesting read:
WASHINGTON, Jun 05, 2001 (United Press International via COMTEX) -- There is
a
point at which stock market movements become detached from reality. Dot-com
mania caused this effect in the tech sector 1999, and it now seems to be
happening in the market as a whole.
Stocks continued to rise Tuesday, in spite of economic numbers that roundly
confirm the "long, deep recession" and "bubble valuation" theses, with the
Dow
up 78 points and the S&P 500 Index up 1 percent Tuesday.
Three statistics, announced Tuesday morning, should have sent the stock
market
into a tailspin but do not appear to have done so.
First quarter productivity, first, was announced by the Bureau of Labor
Statistics as down 1.2 percent. This figures is in fact not as bad as it
looks.
As reported in detail in my "Bear's Lair" column of Feb. 5, the New Economy
"productivity miracle" of the late 1990s was a statistical illusion, caused
by
two factors: a change in calculation methodology, which inflated Clinton-era
productivity statistics by over-reporting net software investment, and the
immense surge in capital investment in the late 1990s, which increased labor
productivity while total factor productivity remained flat.
Both these factors went into reverse in the first quarter; software
investment
was slightly down on the previous quarter, and the trend to replace labor
with
capital tailed off. Hence the high productivity growth figures of 1995-2000
were
greatly inflated, but conversely the nominal 1.2 percent drop in the first
quarter was probably in reality a productivity decline of 0-0.5 percent. We
can
however expect to see further negative productivity numbers, also to some
extent
a statistical quirk, for several quarters into the future as the 1995-2000
distortion is reversed.
Thus the "productivity miracle" was a myth, Alan Greenspan's monetary
policy,
that rested on it for its justification, has been grossly inflationary, and
the
stock market valuations of the past five years have been a gigantic bubble,
"irrationally exuberant" even in December 1996 when the Dow stood at 6,400.
A second number announced Tuesday, by the Census Bureau, was April factory
orders, down 3 percent, with shipments down 2.5 percent and the inventory to
sales ratio up 5 points, to 1.42. Semiconductor orders, in particular,
dropped
34.8 percent. These figure indicates that, contrary to previous speculation,
the
inventory problem in the economy is not on the way to being solved, but is
on
the contrary getting worse. Consequently, capacity utilization can be
expected
to drop further, with inevitable adverse effects on employment, consumer
spending and above all corporate profitability.
Third, the National Association of Purchasing Manufacturers
non-manufacturing
index for May was published, showing a further drop of 0.5 points to 46.6,
which
combined with the drop in the manufacturing index to 42.1 announced Friday,
demonstrates that both the manufacturing and service sectors of the economy
are
now in contraction (indicated by indices below 50), and that the contraction
in
both sectors is increasing in severity. Neither index gave any indication of
the
economy "bottoming out."
Finally, unit labor costs for the first quarter, announced by the Bureau of
Labor Statistics, increased at an annual rate of 6.3 percent, meaning that
manufacturers' labor costs per unit of output increased at that rate. While
the
unit labor cost figures are again not quite as bad as they look (because the
productivity drop was milder than it looks) they are still highly
inflationary.
If Greenspan continues to pump money into the economy with a fire hose, it
is
possible that old-fashioned consumer price inflation will result, probably
by
the fourth quarter. More likely, profit margins will be sharply squeezed.
Margins are under pressure anyway, because the collapse of the tech stock
bubble
means companies are having to pay their employees in cash again, instead of
stock options, but if, as seems likely, the pricing power of companies is
limited going forward, while cost pressures are great, the squeeze will be
truly
draconian.
Since, outside the New Economy, stocks are still supposed to be valued in
relation to earnings, this will cause a sharp further drop in stock values,
though maybe not immediately in stock prices. Most likely, stocks will
continue
to rise gently, oblivious of reality, until a correction comes.
Maybe a sharp correction, like the 20 percent drop in one day of October 19,
1987.
Maybe three such sharp corrections, one after another.
By MARTIN HUTCHINSON, UPI Business & Economics Editor
Copyright 2001 by United Press International. |
