Moody’s Investors Service reports that the credit strength of U.S. corporations continued to fall sharply in the second-quarter of 2001 as rating downgrades outpaced upgrades by a factor of three-to-one.

This marked the 13th consecutive quarter of credit deterioration, with most of the trouble in the industrial sector.

Looking ahead, Moody’s cautioned that a continuing preponderance of rating reviews for downgrade in the second quarter point to decidedly negative trends over the next three months. It says that “credit trends remain particularly negative in the industrial sector, as weaker demand and pricing power, declining profit margins and plunging capacity utilization have diminished debt repayment capabilities”.

“Any reduction in credit strains is likely to be modest until sales and profits rebound,” said senior economist John Puchalla. “Lower borrowing costs and slower debt growth have reduced debt service, but not by enough to fully offset the drag on credit worth from the steepest slide in corporate earnings in 10 years.”

While the falloff in credit quality is the worst in a decade, one thing is different says Moody’s — the health of banks. “The much stronger position of the financial sector provides an important liquidity backstop to the U.S. economy that was missing during the early 1990s credit crunch,” said John Lonski, Moody’s chief economist.

“Liquidity still flows freely through the U.S. economy, except for the lowest-rated companies.” Lonski added that previous and possibly forthcoming interest rate cuts by the Federal Reserve, as well as federal tax cuts, should eventually abet a firming of corporate credit worth. Still, Lonski said that “a renewed deceleration of household spending in response to rising joblessness could extend the slump in corporate earnings and deepen the loss of credit worth.”