Consumer and business confidence seen as key to weathering economic storm
Economists raise odds of recession
The 53-year-old accountant, who had been out of work for months and only recently landed a temporary job, spoke for many Americans when she said: "We're getting numb."
Consumers and businesses have been buffeted by a spate of bad economic news in the past three years. For every positive sign that a recovery has taken hold, there were other signals that raised doubts. Then came Monday's stock market plunge on the heels of the unprecedented downgrade of the country's credit rating.
Stocks recovered much of the lost ground on Tuesday, but Federal Reserve policymakers also warned that they now expect a "slower pace of recovery over coming quarters" and pledged to keep interest rates low in a bid to prop up the economy. And several prominent economists have raised the odds that the economy could slip back into a recession.
Now, with the nation's economy in the balance, the future may largely depend on the confidence of consumers to spend and businesses to hire and expand. But consumer confidence hasn't been robust for years, rising slightly in July after falling the month before, and many large companies are refraining from hiring despite strong earnings and fat cash reserves.
"The events of this week and last week are not going to give any sort of boost to confidence," said Lynn Franco, director of the Consumer Research Center at the Conference Board, which publishes the widely watched consumer confidence survey.
This past recession was the first time that pessimists outnumbered optimists when asked about income expectations in the survey, and that's a trend that continues, Franco said. Indeed, even though the recession officially ended in June 2009, consumer confidence remains at a level that's usually seen in recessions, she said.
"We continue to see a cautious consumer who weighs … spending decisions very carefully," Franco said.
David Resler, chief U.S. economist with Nomura Securities International, said Standard & Poor's could have downgraded the government's credit rating any time in the past few years for the reason it did so now: steep government debt and political gridlock preventing a long-term fix.
But the timing of the S&P downgrade is particularly bad, given far more serious issues with debt crises spreading across Europe, Resler says.
"Businesses were already taking a wait-and-see posture," and now might hold that position, he said. "The longer businesses adopt a wait-and-see posture, the more difficult for the economy to maintain its growth."
There has been more chatter about the possibility that the country could slip back into a recession. Resler predicted a 30 percent chance of that happening. A new Reuters poll of analysts pegged the likelihood of another recession at one in four, higher odds than a month ago when the chances were one in five.
Monday's 635-point plunge in the Dow Jones industrial average recalled the fall of 2008, after investment banking giant Lehman Brothers collapsed and the government stepped in to shore up other institutions.
But there is a major difference between then and now, said Dick O'Brien, senior executive vice president at Folger Nolan Fleming Douglas brokerage in Hunt Valley. "In 2008, there were people really concerned about the possibility of the collapse of the banking system," O'Brien said. "The banks are a lot more liquid today and a lot sounder."
Still, that might not reassure consumers.
"They will go into the bomb shelter and stay there until the sun starts shining," O'Brien added. "With the housing market and the amount of things going on in the [stock] market, consumers will stay in that bomb shelter for close to a year."
Mary Dussent of Northeast Baltimore, for one, said recent events have prompted her and her husband to reconsider selling some investments to buy a new car. "I don't know what we'll do now," she said.
The Dow quickly rebounded on Tuesday by nearly 430 points, or nearly 4 percent, but it still has ground to make up.
Nick Bruns said he's worried less about the impact on his nest egg than on the economy. At 32, he is just starting to invest and think about retirement and shrugged off the market tumble. "The nice thing is you've got a lot of time with this," he said.