July 11, 2001

The rise in unemployment to 4.5% in June served as yet another indication of the country's economic woes. Job cuts abound as firms, confronting lackluster demand and inflated capacity, resort to laying off workers in order to cut costs. It was the technology sector that first felt the ground give beneath its feet. Telecommunications firms like Nortel and Lucent discovered that the projected demand for their equipment had been woefully overblown; now, as customers reined back on spending, their inventories accumulated sharply while sales fell.

As firms seek to eliminate bloated inventories, their cause is not helped by the anemic economies of Europe and Japan. With the global economy slowing down perceptibly, U.S. exports have fallen--a phenomenon aided also by the rise in the value of the dollar (which renders U.S. goods more expensive in foreign currencies).

Alan Greenspan, the Chairman of the Federal Reserve, has become increasingly concerned by the rapid decline in economic activity. Although inflation--the Fed's eternal bugbear--has picked up steam in recent months, Greenspan has concluded that the damaging consequences of rising prices are outweighed by the problems unleashed by a slowing economy. Accordingly, he has slashed interest rates in an effort to spur spending by consumers and firms. In all likelihood, the economy will respond favorably in the course of the next few months to this expansionary monetary policy.

On the energy front, there is good news for the economy. Oil prices, having scaled the $30-per-barrel mark a few months ago, now seem to have settled around $25. Users of energy heaved a sigh of relief as prices of gasoline and natural gas descended from their lofty perch. Greenspan, too, must have silently said a prayer of thanks: Falling oil prices reduce the risk of higher inflation.

Bush's tax cuts will help as well. Despite the overly favorable treatment accorded to the rich, the recent tax-cut accord will provide some stimulus in the short run. With rebate checks (of up to $600 for married couples) set to arrive in the mail shortly, taxpayers are likely to increase spending. Bush no doubt hopes for a large increase, but will consumers oblige?

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