Falling Shares as a Symptom of Something Bleaker
www.nytimes.com Falling Shares as a Symptom of Something Bleaker
By DAVID LEONHARDT
Maybe the stock market really has been predicting the future of the economy.
In just the last two weeks, growth has begun to look a good bit weaker than it did during the summer, when the economy seemed far healthier than Wall Street. One victim of the new weakness could be the soothing theory that the continuing fall of stocks is nothing more than a correction of the 1990's bubble, rather than a reflection or a cause of new economic problems.
Pick just about any measure of economic activity, and it looks uglier than it did before Labor Day. Ratings of the economy's condition have fallen to their lowest level since 1994, according to an ABC News/Money magazine survey and one by the Conference Board. These worries seem to have led to small cuts in consumer spending, with sales weakening even at Wal-Mart.
Still struggling to revive profits, businesses have reacted to the drop in confidence and a potential war in Iraq by making a new round of cutbacks. Office vacancy rates have risen. Airline travel has stopped growing. Last month, the manufacturing sector shrank for the first time since January.
Most worrisome, many companies have turned to layoffs again. Although the Labor Department reported last week that the unemployment rate eased slightly in September, a separate survey found that business payrolls fell for the first time in five months.
"All of these pieces are painting an increasingly dark picture," said Mark Zandi, the chief economist at Economy.com, a research company. "I just get the sense things are stalling, and I'm getting worried."
The economy might still avoid a double-dip recession. But the recent bad news has raised anew the prospect that this year's recovery could have been the kind of false start that has followed the bursting of other bubbles in the past.
In the two and a half years since the stock market peaked, companies have sharply cut their spending on new factories, equipment and technology. Many already own more than they can profitably use. Others looking to expand have been stymied by the difficulty of raising money. In this way, the stock market can create a self-reinforcing cycle of slow economic growth and falling stock prices.
But it also creates an odd incentive for consumers to continue spending, at least temporarily. In a bear market, people are less afraid that buying a new car or a second house will tie up their money and cause them to miss out on the kind of rich stock-market returns that can pay for college and retirement, noted John H. Makin, a resident scholar at the American Enterprise Institute in Washington. So they spend even as their portfolios shrink.
The recent recession, which probably ended late last year or early this year, was the first in more than 50 years in which consumer spending did not fall in a single quarter, according to the Commerce Department.
The dynamic cannot last forever, however. Eventually, people realize they need to save more than they did when rising stocks were fattening their savings. If their frugality gives companies a new reason to avoid big investments, the economy will be left without a growth engine.
In Japan the current benchmark for grim theories about the American economy this chain of events happened over about three years, Mr. Makin said. Although the Nikkei 225 index lost almost half of its value in 1990, Japan's economy grew 5.3 percent that year and 3.1 percent the next, according to the Organization for Economic Cooperation and Development. For the next three years growth did not exceed 1 percent.
The United States has already avoided following that timetable, thanks to the economy's decent growth this year. Low interest rates, low inflation and a modest decline in the dollar, which will lift exports, all offer credible reasons to think the economy will improve over the next year.
But those strengths are not, as they have sometimes seemed, reason to see the sharp fall in the stock market as a sideshow. With each piece of evidence that the economy was improving earlier this year, the fact that stocks were not rebounding as they had during every other economic recovery since the 1930's seemed less relevant.
The last few weeks have provided a reality check. Despite what the metaphor suggests, financial bubbles tend to lose their air gradually and unevenly. The effect on the broader economy is never quick and rarely small.
-------------
BTW, did anyone else think that the comparison between the failing German bank and the Creditanstalt failure of the early 1930s was stretching it too far?
JD
