While consumer buying habits have remained relatively strong throughout the downturn, evidenced by growth in both auto and home sales, businesses have been hurt the most. Faced with lower output and huge excesses in inventories, corporations were forced to slash expenditures and reduce payrolls in an effort to meet already lowered profit expectations. The corporate profit picture continues to be one of the most significant pieces of the economic puzzle. An improvement in the earnings picture will enable corporations to push additional capital spending and stem the layoff activity that is hampering overall consumer confidence. The positive effects from these lower interest rates may have just begun to be felt in the economy, as the economic decline seems to have slowed.
Productivity remains positive and companies seem to be correcting their inventory problems.
Additionally, consumer confidence has improved lately, which is supported by strength in income levels and prospects for tax relief. Conversely, weaker foreign demand will impact the trade deficit and could act as a drag on the recovery in the domestic economy. Foreign economies seem to be lagging behind the U.S. economy as many central banks have not been able to lower interest rates quickly enough to combat weakness in both Japan and Europe. Although equities overseas have suffered along with those in the U.S. throughout 2001, foreign stocks did not enjoy as much of a rebound as domestic equities in the second quarter. Growth stocks returned to favor during the period, and both smaller-sized companies and cyclical sectors experienced very strong performance.