David Levy is vice chairman of the Jerome Levy Economics Institute and director of its Forecasting Center.

Corporate profits have been sagging lately under the weight of trade problems, fiscal drag and declining inventory investment. With lower profits, businesses are less willing and less able to invest in new equipment; when profits are down from their year-earlier level, investment soon falls off as well (chart 1). Newspapers are now reporting on cutbacks in capital spending plans. When individual businesses trim their investment outlays, the business sector as a whole faces decreased demand, which puts further pressure on profits. This "vicious cycle" can drag an economy into recession.

Meanwhile, consumers are starting to lose confidence. Both of the major, long-standing indices of consumer expectations have been falling in the last several months (chart 2). If consumers become too pessimistic, they will alter their spending patterns. During the 1990s expansion, consumers have saved less and less of their income, and any shift back from spending to saving will exacerbate the economy's difficulties.