Global economic problems shaking the bull market
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By Elsa C. Arnett
INQUIRER WASHINGTON BUREAU
International turmoil is spreading to America, shaking consumer confidence and threatening the seemingly unsinkable U.S. economy.
This week's political instability in Russia has compounded worries about the continuing economic crisis in Asia, mounting trouble in Latin America, and plunging stock prices around the world. Prospects of a reinvigorated war against terrorism and concerns about President Clinton's political future have contributed to the uncertainty.
All of this helped drive the Dow Jones industrial average down nearly 500 points this week and sent danger signals to millions of Americans who dabble in stocks or have their retirement savings locked into 401(k) plans heavy with stocks.
The consequence: Consumers are increasingly likely to think twice before buying a new car, taking a trip to Europe, or remodeling the basement, analysts say. That shift in attitudes could multiply into economic trouble, they add.
"It's not a wholesale sort of panic or paranoia -- Wall Street is more excited than Main Street -- but the average person is starting to get a sense that there's a real problem," said Robert Weagley, a consumer-economics expert at the University of Missouri at Columbia.
Consumer confidence dropped in July and August, the Conference Board, a private business research group in New York, reported this week.
"During the last week or so, the greed which has been driving the stock market has turned into fear," said Cynthia Latta, an economist with Standard & Poor's DRI, a leading forecasting firm in Lexington, Mass. "I expect consumer confidence will slip down further if the stock market continues to fall, which I suspect it will.
"This is a needed correction," said Latta. But she warned: "There's a fairly substantial risk that this could degenerate into a recession."
Michael Walden, an economics professor at North Carolina State University who specializes in consumer markets, is more sanguine: "I don't think the turmoil will cause the U.S. economy to go into a bona fide recession, but it will slow growth."
Even Americans who do not scour the financial pages daily can be unsettled by economic tremors. Economists call it the "wealth effect": People spend based not only on what they have in their pockets, but on how much they have in their investments. If their stock portfolios are up, they may even be assured enough to spend beyond their means.
"There are a lot of average little guys who are in the stock market, and they are used to getting good returns," said Weagley. "So even though a loss is 'on paper,' when you have that loss, the average person feels it, and they tend to pull back a bit."
That means consumers are likely to be a little more cautious about what they buy, and they may feel a bit less cavalier about piling up debt.
Spending on durable goods -- high-ticket items such as computers and refrigerators that last several years -- dropped in July.
Consumer spending is an important economic engine, accounting for about two-thirds of the American economy. If spending slows, the dangers of a recession grow.
Signs of trouble have been mounting in recent weeks.
Aside from a 13 percent drop in the U.S. stock market over the last few weeks, corporate profits were down in the second quarter from the same period last year.
American exports dropped as well, a sign that the Asian crisis is having a direct effect on the sale of U.S. products.
Growth in the gross domestic product -- all the goods and services produced in the United States -- also slowed markedly during the last quarter.
An economic slowdown could lead to more trouble if it brings about drops in personal income or increased unemployment. Many consumers already have spent so much they could easily fall into serious economic difficulty. Consumer debt is extremely high, and personal bankruptcy filings have been at record levels over the last 12 months.
Continuing international turmoil also could make for more worries and drive the economy into recession.
If the political unrest in Russia intensifies, there will be renewed concerns about nuclear weapons and international security. That could force Congress to spend billions more on defense and international aid.
Problems also will grow if orders from Asian markets for U.S. products continue to decline. President Clinton noted yesterday that U.S. farm exports to Asia are down 30 percent from last year.
If a major U.S. corporation such as General Motors or Wal-Mart suddenly reported losses or announced large layoffs or restructuring plans, that could shake confidence as well, economists said.
And if there was a terrorist strike inside the United States, Weagley said: "That would really throw the switch for a lot of people. It would lead to a real feeling of insecurity.
"Markets get bid up to unrealistic highs based on optimism and positive thinking, so they can fall down based on negativism," he said.
Early indications of a recession would be slower retail sales during the coming holidays and a sluggish housing market.
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