Economy in avalanche mode, and press just getting around to reporting what I had reported almost 1 year ago.
Message 13423204
"if market drops much further- and looks like monumental crash about to extend itself- recession is a given by Fall/Winter- lots of spending power being drained."
ScottOnStocks.com
Saturday March 17, 11:37 am Eastern Time
Wall St's Slide May Curb Spending
By Elizabeth Lazarowitz
NEW YORK (Reuters) - Americans' voracious appetite for goods and services has helped drive U.S. economic growth, but that could change if the stock market's recent breakdown turns the extravagant consumers of the 90s into the misers of the new millennium.
Steve Russell, a 30-year-old employee of a high-tech company who lives in New Jersey, said he had been talking with friends about buying a house, but the recent tumult in the stock market had convinced them to put off their plans.
``Because of the drop in the last month or two, it's very scary,'' Russell said, standing on a corner near the New York Stock Exchange. ``We're going to sit tight and find out what is the next step -- see if the market maybe turns around. Hopefully, it's soon.''
About $4.9 trillion have evaporated from the stock market since it peaked in March of last year, based on the drop in the Wilshire 5000 index (.TMW), one of the widest measures of the stock market, and the dissipation has many investors shaking their heads as they scan the dwindling numbers in their account statements.
That, analysts say, could further rattle shaky consumer confidence and undermine consumer spending, one of the linchpins in the United States' decade-long economic expansion.
Moreover, household net worth contracted for the first time in about 50 years -- down 2.1 percent to $41.4 trillion at the end of 2000 from $42.3 trillion at the end of 1999 -- according to a recent report by the Federal Reserve.
WALL STREET'S AGONY UNRELENTING
Stocks took a gut-wrenching tumble on Wednesday as worries about Japan's troubled banking sector, a sagging U.S. economy and soft corporate profits sparked a furious sell-off that drove the blue-chip Dow Jones industrial average (.DJI) below the key 10,000 mark for the first time since last October.
The sell-off also lodged the Nasdaq Composite index (.IXIC) deeper below the key 2,000 level, which was breached on Monday for the first time in two years. The tech-packed index has fallen more than 60 percent from all-time highs near 5,000 hit just about a year ago.
The Standard & Poor's 500 index (.SPX), a broad stock market gauge, remained pinned in bear market territory -- down more than 20 percent from its high -- a phenomenon not since the 1987 stock market crash.
Wall Street has been force-fed steady doses of devastation since early 2000 -- a shock for investors who had been lulled by years of nothing but blockbuster gains. So far this year, the S&P 500 is down more than 20 percent.
``After the 2000 experience and the year-to-date performance of the stock market this year, saving may be in again,'' Paul Kasriel, head of economic research at The Northern Trust Company, said in a research report. Kasriel noted that the recent drop in household assets reported by the Fed was the first one since the start of the report in 1952.
An increase in personal spending without an offsetting boost in business spending could spell trouble for the economy, necessitating further interest rate cuts to prevent a recession, Kasriel wrote.
``WEALTH EFFECT'' LOSES POWER
Consumer spending, which makes up about two-thirds of economic activity, is already taking a hit as the ``wealth effect'' dissipates with the decline in equity prices, leaving some Americans feeling like their wallets are a little flatter than they once were, analysts said.
``The stock market is the 2,000-pound gorilla that is affecting consumer spending,'' said Henry Willmore, chief U.S. economist at Barclays Capital.
In recent years, the 'wealth effect,' was adding about 2 percentage points to consumer spending growth, Willmore said. ''It's actually going to be a minus going forward over the next four quarters. I think it's going to subtract about 1.5 percentage points, maybe more.''
Consumer spending grew 5.5 percent in the second quarter of 2000, made a 3.7 percent gain in the second half of last year, and Willmore said he expects it to slide to 2.5-3.0 percent growth in the first quarter of this year.
U.S. retail sales fell unexpectedly in February, declining for the first time since November, although a sharp upward revision to January's figures suggested consumers were not completely forsaking their vital roll just yet.
The impact of swooning stock markets is likely to be felt by a wide range of Americans, now that about half of all U.S. households now have some exposure to the stock market, through 401(k) retirement plans, individual retirement accounts, mutual funds and individual stocks.
Americans have also taken on an increasing amount of debt -- U.S. households carried $7.6 trillion in liabilities at the end of last year, up about 4 percent from $6.9 trillion at the close of 1999, the U.S. central bank reported.
``Even people who didn't participate at all in the stock market may hear the market is falling apart, and they may become less confident as well,'' said Stephen Stanley, senior market economist with Greenwich Capital Markets, in Greenwich, Conn.
But stock market wealth is not the only thing driving spending. Job-cut announcements -- already becoming more visible -- could send Americans into a penny-pinching mode.
High-tech heavyweights like computer networking company Cisco Systems (NasdaqNM:CSCO - news) and mobile communications giant Motorola (NYSE:MOT - news) have recently announced large layoffs.
As long as unemployment remains relatively low, however, consumers' spending habits will not change significantly, Stanley said. ``People are going to buy fewer Porches and less diamond jewelry, but the average person isn't going to start cutting back on their groceries or their clothing purchases, the meat-and-potatoes that make up the vast majority of consumer spending.''
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