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mpc: 2 further tightening in credit conditions over the past quarter in the Federal Reserve Senior Officer Loan Survey. 5 Since early June, credit spreads for lower-rated borrowers had widened sharply in the United States. Staff analysis suggested that this might reflect firm-specific or sectoral factors rather than broader influences; sharp increases in spreads had been more prevalent in the communications and technology, and electronic, sectors. A differentiated pattern of this sort was typical of a period of rapid structural change, in which some firms were `winners' and others lost out, resulting in spreads increasing on average. But spreads would also widen in a general economic downturn, with the risk of default increasing for financially weaker companies. If confidence fell sharply while spreads were increasing, the `soft landing' might prove rather bumpy. 6 Computers, communications equipment and semiconductors continued to account for most of the increase in US manufacturing output. Orders data, however, suggested a deceleration in demand might be in prospect, raising the possibility of future overcapacity in these sectors. Equity prices for such companies had also moved sharply. While the NASDAQ index was still higher than it had been for most of 1999, it had fallen 45% since mid-March 2000. This might have implications for other parts of the US economy, both via confidence and wealth effects. That said, expectations of growth in earnings per share remained quite strong, at around 8% for the next year according to the recent Merrill Lynch survey of fund managers. 7 While movements in the NASDAQ index would not of themselves generate significant wealth effects, this was not the case for equity markets taken as a whole. Indeed, the previous rise in equity prices might well explain part of the fall in the US saving ratio. Now that wealth was no longer rising as a result of increasing equity prices, this might lead (once the lags had worked through) to a greater propensity to save out of current income. And if market participants revised down their estimates of trend productivity growth, equity prices might fall still further. It was recognised that consensus expectations of corporate earnings growth, although currently remaining strong, sometimes failed to signal a prospective downturn. If so, GDP growth could fall sharply, especially if inventories were cut back. In such circumstances, however, the Federal Reserve would have scope to adjust monetary policy accordingly, provided inflationary pressures were subdued.