This compression makes the adjustment feel more severe and results in a sharp rise in layoffs, which shakes consumer confidence. So, too, warnings about profit shortfalls, such as Cisco's in mid-April, cause jitters among investors. That's why, even though the inventory correction directly affects just a small segment of the economy, it has large spillover effects. Luckily, the adjustment to stock levels, especially in the tech sector, is already well under way. Keep in mind that tech manufacturers aren't just adjusting to demand problems but also face overcapacity in their own sector.
Consumers hold the key.
So far at least, they remain committed to spending, though at a more modest pace. The April retail increase, however, was better than expected and bolsters the argument that consumers can keep this expansion going. Although the Fed did not mention costlier energy explicitly in its May 15 statement, it is always on Greenspan's list of concerns, since it boosts production costs and cuts household buying power. Higher fuel prices are also pushing up the top-line inflation numbers, but there is scant evidence that companies are able to pass along their higher costs to customers. One of the key differences in this business cycle is that low inflation is giving the Fed the room it needs to act aggressively.