Dow Jones Index Drops by About 35pct Since early 2000

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Last updated at: (Beijing Time) Thursday, August 08, 2002

Dow Jones Index Drops by About 35pct Since early 2000

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The United States stock market has seen a sharp plunge in the past months despite the Dow Jones industrials closing up 230.46, or 2.9 percent, at 8,274.09 Tuesday.Many analysts are worrying that the tumbling will pose new risks to the US economic recovery now underway.

The plunge of the US stocks has been characterized by a fast and enduring decline. Since early 2000, the Dow Jones index has dropped by about 35 percent. However, the index has fallen more than 17 percent this year following the collapse of Enron last December. The seriousness of the impact upon the confidence of investors by US accounting scandals can thus be seen.

The plunge of US stocks will pose two major risks to the economic recovery.

Firstly, it will be difficult for the corporations to increase fixed investment, the major impetus to the economic recovery, and the investments may continue to fall, obstructing the paces of recovery.

The major reason for the economic recession last year was that the sharp decline of corporate profits had substantially decreased their fixed investment, and huge inventories rendered it a must for corporations to reduce production and cut down inventories. Therefore, the current pace of economic recovery will be determined mainly by whether US corporations can increase investment quickly.

However, as shown by the latest statistics, the fixed investment of US corporations fell by 1.6 percent in the second quarter, after dropping by 13.8 percent in the fourth quarter of last year and 5.8 percent in the first quarter this year. As part of the decline, structural investment dropped by 14.2 percent in the first quarter and 14 percent in the second. In order to expand investment and production, US corporations must absorb capital from the stock market.

But the plunge of stocks seriously affects the absorption of capital from the market. It would be certain that US corporations will be placed in a very hard predicament, and the pace of profit raising and investment expansion will be very difficult as well.This is a pressing challenge which the US economy faces today.

Secondly, the plunge of stocks will reduce consumer spending which accounts for two-thirds of GDP in the United States.Consumer spending has been the major propellant of US economic growth, and the weakening of the propellant will increase the difficulty of economic recovery. The plunge of stocks has already brought huge economic losses to US households, thus affecting their future consuming psychology and behavior.

At present, 60 percent of households in the United States hold various stocks, the largest percentage yet. The wealth of American households has thus shrunk greatly as the result of the stock plunge.

As indicated by the latest survey by the University of Michigan,consumer confidence of middle-class households with annual incomes above 50,000 dollars, the principal part of US stocks holders, was hardest hit by the plunge resulting from accounting scandals. The

property losses brought by the plunge of stocks will definitely reduce consumer spending in the United States, thus slowing the economic recovery.

As pointed out by many economic analysts, the confidence crisis caused by US corporation scandals is not curable within days, and it is still arguable whether the US stocks have reached bottom.

Investment confidence cannot recover in a short period of time,either. Therefore, the current bear market for US stocks might continue for some time.

Now, fears are spreading that a second dip into recession,which seemed an outside risk not long ago, might not be so unlikely, The Wall Street Journal said Tuesday.

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