The U.S. economy of 2001 must seem like a nightmare to Alan Greenspan. Five long years ago, the wily Federal Reserve chairman drew the ire of investors by publicly deriding the "irrational exuberance" of the stock market, sending the then-soaring markets into a brief tailspin. To some, it appeared that the Fed was trying to influence stock prices.

Those comments were thrown back in Mr. Greenspan's face as a flood of new capital drove markets to heights many-fold higher than those that appeared unsustainable to the implacable Chairman. But that climb has just made the unwinding of the market that we've witnessed over the last nine months that much more painful to the general economy, which has been the Fed's real concern all along.

The second quarter U.S. economy bears the imprint of the financial market's demise as plainly as the ink appears on this page. The well of new business capital has gone shockingly dry, despite the vigorous attempts by our central bank to breathe new life into it with interest rate cuts.

Thanks to the American consumer, the U.S. economic expansion remains alive through the first half of the year. But the margin of error has practically vanished. The preliminary report on Gross Domestic Product for the national economy shows a scant 0.7 percent rate of expansion for the overall economy in the second quarter of 2001, down from the 1.3 percent rate posted during the first three months of the year. Stable, if unspectacular, growth in consumer spending helped bail the economy out of its closest brush with recession since 1991.

The 2.1 percent increase in consumer spending in the April-June period was primarily attributable to a surprisingly strong 6.0 percent rate of increase in spending on durable goods. The contrast between reasonably brisk sales of durables, and markedly lower rates of industrial production, is resolved in the report on business inventories, which recorded their second consecutive drawdown in the second quarter. Given the continued slide in factory orders in the most recent data, there is every reason to expect this imbalance to continue through the summer.

But business spending is moving in the other direction. Were it not for the continued health of the residential housing industry, every major investment category would have posted declines in the second quarter. The rates of decline in commercial buildings and equipment and software investments reached the double digits. The drying up of capital and consequent belt-tightening by businesses is casting a pall on an otherwise healthy economy, and may make their gloomy expectations self-fulfilling.

Other special factors figured into the second quarter economic scorecard as well. Prominent among them was strong growth in state and local government spending, rising to a 7.5 percent annual rate in the April--June period. Given the pressure the slowdown has placed on state budgets, this buildup will not continue much longer.

The longest running economic expansion in the era of modern statistics is still intact, barely. Unfortunately, the momentum that it delivers as we go into the second half of the year is in the wrong direction.