clear
Friday October 19th, 2018 1:25AM

Stock drop could pose risk to US economy _ if it endures

By The Associated Press
Related Articles
  Contact Editor

WASHINGTON (AP) — The tumble in U.S. stock prices has inflicted psychological pain and financial losses — at least on paper — for people with a meaningful stake in the market. Their anxiety conjures another fear, too: That consumers and businesses might slash their spending in response.

Consumers are the engine of U.S. economic growth, so any sharp pullback in their spending would hurt. Could the result be a weaker economy and lost jobs?

So far at least, there's little sign that the correction in the Dow Jones industrial average — it dropped 10 percent from its peak late last month — will squeeze the economy. After rallying by the time the market closed Friday, the Dow is still about 50 percent above where it was after its last correction in February 2016. Most economists see the current drop as an inevitable result of stocks' rapid ascent since then. And few think most investors are about to curb their spending.

Market declines that do end up derailing an economy are typically triggered by financial imbalances — unsustainable debt, for example, which ignited the Great Recession in 2007. Americans haven't taken on nearly as much debt as they did before the financial crisis. Banks have much more cash in reserve. Regulations have reduced the kind of high-risk mortgage lending that fed the 2008 financial crisis. Corporate profits are strong and growing.

"The economy looks quite resilient to this type of relatively modest shock," said Gregory Daco, chief U.S. economist at Oxford Economics.

Referring to the stock market's swoon, Daco said: "We might be seeing a more normal evolution of things. Ups and downs are not atypical."

Still, if stocks should fall into "bear market" territory — defined as 20 percent below recent peaks — or plateau for months without any real gain, the economy would face greater risks.

Consumer confidence would likely suffer. Diminished household confidence tends, over time, to slow growth. Americans are collectively far more likely to spend more — especially for costly purchases like homes, cars and vacations — when their household wealth is stable or growing and they're optimistic about their financial futures.

Confidence among consumers and businesses jumped after President Donald Trump's election and reached a 17-year high in November. Stock prices rose, and so did consumer spending.

What economists call the "wealth effect" is the phenomenon that occurs when growing home values and stock prices make people feel richer and more secure. Households tend to spend down some of that wealth, thereby boosting the economy.

Conversely, when household wealth shrinks significantly, the reverse tends to occur: People, feeling less confident about their finances, usually spend less.

One trend that may shield the broader economy this time is that, according to many analysts, the wealth effect is smaller than it was before the recession. A key reason is that Americans have been a bit more frugal for the past decade, with many regarding their housing or stock market wealth as more ephemeral than they did in the past.

Since the recession, consumer spending has grown about one penny for each dollar of additional stock market and housing wealth — down from 3.5 cents before the downturn — said Michael Feroli, an economist at JPMorgan Chase. As a result, spending might not fall as much this time.

Even if the wealth effect is less pronounced, it still has an impact. The sharp rise in share values in the past year — before the past week's correction — added about $8 trillion in household wealth. Even if just one penny of every dollar of that gain were spent, it would translate into $80 billion, or about one-quarter of the overall increase in consumer spending in 2017, Feroli said. A reversal of that trend could pinch the economy.

Businesses, too, could pull back if stocks keep falling. If corporate managers worry that Americans eventually won't spend as much in the face of a sustained market decline, they would likely stockpile fewer products and postpone plans for hiring or expansion.

A falling stock market can also make it more expensive for companies to borrow and raise money, because investors become less willing to buy the companies' stock offerings. Companies are then forced to borrow more instead — at higher loan rates.

Most economists, though, say stock prices would have to fall much further for these depressive effects to kick in. In fact, Feroli said he expects the economy to accelerate somewhat this year in part because of big spending increases that are included in a budget bill Congress approved early Friday morning.

The economy will likely now expand 2.6 percent in 2018, Feroli estimates, up from a previous forecast of 2.2 percent.

Others, too, think the economy will remain resilient unless the stock market keeps falling.

"In order for it to start affecting our forecast, it has to persist for a while," said Joel Prakken, chief U.S. economist for Macroeconomic Advisers by IHS Markit. "It's just not clear to me yet where this is going to settle."

Mark Zandi, chief economist at Moody's Analytics, suggested that the current gyrations are a "garden variety correction" — for now.

"These things can take on a life of their own," Zandi said. "Ten percent down is no big deal. Twenty percent — that's a big deal."

___

AP Economics Writer Paul Wiseman contributed to this report.

___

Contact Chris Rugaber on Twitter at http://Twitter.com/ChrisRugaber

  • Associated Categories: Local/State News, Associated Press (AP), AP National News, Top General short headlines, AP Business, AP Business - Corporate News, AP Business - Economy, AP Business - Financial Markets
© Copyright 2018 AccessWDUN.com
All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.
Turkish military says another soldier killed in Syria
Turkish military announces death of another soldier in Ankara's operation against Kurdish militia in northern Syria
10:16AM ( 13 minutes ago )
The Latest: Russia: Passengers on crashed plane were locals
Russian officials say all passengers aboard the airliner that has crashed outside Moscow are believed to have been residents of the region that was the plane's destination
10:03AM ( 27 minutes ago )
US women rally to beat Finland 3-1 in Olympics opener
The United States women's hockey team rallied to beat Finland 3-1 to remain perfect when opening an Olympic tournament
10:00AM ( 29 minutes ago )
Associated Press (AP)
Plane with 71 aboard crashes near Moscow; no survivors seen
A Russian passenger plane believed to be carrying 71 people crashed Sunday afternoon near Moscow, shortly after takeoff from one of the city's airports
9:39AM ( 50 minutes ago )
The Latest: Canadians shut out Russians in women's hockey
Rebecca Johnston scored two goals as Canada shut out the Russians 5-0 in the country's quest to keep its golden grip on women's hockey in the Olympics
9:32AM ( 57 minutes ago )
The Latest: Parts shortage grounded crashed jet for 2 years
Russia's state news agency Tass says the passenger airliner that crashed outside Moscow on Sunday had been flying since 2010, with a two-year break because of a shortage of parts
9:32AM ( 58 minutes ago )
AP National News
Even when not at fault, Amtrak can bear cost of accidents
Amtrak may well end up paying for accidents even if it doesn't cause them.
5:52AM ( 4 hours ago )
Trump accuses Democrats of playing politics with memo
President Donald Trump accuses Democrats of playing politics with classified information
5:34AM ( 4 hours ago )
South Korea's Moon may be on brink of legacy-defining moment
South Korea's liberal president, Moon Jae-in, is true believer in the power of Koreans talking to Koreans when it comes to solving their woes
5:10AM ( 5 hours ago )
Top General short headlines
India's Modi in UAE to boost ties with Gulf Arab states
India's Modi in second UAE visit seeking stronger economic, cultural ties with big-spending Gulf Arab states
9:33AM ( 57 minutes ago )
At last minute, Russia scrubs cargo launch to space station
Russia has scrubbed the planned launch of an unmanned cargo spacecraft that was to have delivered tons of supplies to the International Space Station
9:14AM ( 1 hour ago )
Iran marks anniversary of Islamic Revolution after protests
Iranians mark anniversary of 1979 Islamic Revolution, just weeks after anti-government protests across the country
8:16AM ( 2 hours ago )
AP Business
Canadian PM Trudeau and LA mayor toast friendship with hike
Canadian Prime Minister Justin Trudeau toasted the country's friendship with Los Angeles by taking a brisk morning hike with Mayor Eric Garcetti on the last day of his three-day swing through California
3:44PM ( 18 hours ago )
Canadian PM Trudeau talks up friendship, ties with LA mayor
Canadian Prime Minister Justin Trudeau posed for a selfie with Los Angeles Mayor Eric Garcetti and talked up ties between their two countries on the last day of his 3-day swing through California
2:28PM ( 20 hours ago )
Will stock plunge hurt US economy? Depends how long it lasts
Plummeting stock market seems unlikely to slow US economy _ unless it rages on
9:36AM ( 1 day ago )
AP Business - Corporate News
On drug costs, modest steps follow Trump's big promises
President Donald Trump has made big promises to reduce prescription drug costs, but his administration is moving toward relatively modest steps such as letting Medicare patients share in manufacturer rebates
8:10PM ( 14 hours ago )
Lobbying expenses spiked as Congress shaped tax overhaul
Money spent on lobbying by corporations, trade groups and special interests spiked during the final three months of 2017 as they battled for the biggest breaks possible in the most dramatic tax overhaul in decades
9:38AM ( 1 day ago )
The Latest: Officer in Canada prime minister motorcade hurt
A crash of motorcycle officers accompanying Canadian Prime Minister Justin Trudeau on a visit to California sent one officer to the hospital, but Trudeau's vehicle was not involved and he wasn't hurt
6:28AM ( 1 day ago )
AP Business - Economy
Pennsylvania race to test how tax law plays with voters
A Pennsylvania congressional race offers an early test of Democrats' and Republicans' arguments over the new tax law
12:03PM ( 22 hours ago )
In Pennsylvania, tax arguments from Dems, GOP get early test
A Pennsylvania congressional race offers an early test of Democrats' and Republicans' arguments over the new tax law
12:39AM ( 1 day ago )
Markets Right Now: Stocks swing back to gains, Dow up 330
Stocks swung dramatically between gains and losses Friday as the Dow industrials recovered from a 500 point loss.
4:12PM ( 1 day ago )
AP Business - Financial Markets
Turkish military says another soldier killed in Syria
Turkish military announces death of another soldier in Ankara's operation against Kurdish militia in northern Syria
10:16AM ( 13 minutes ago )
The Latest: Russia: Passengers on crashed plane were locals
Russian officials say all passengers aboard the airliner that has crashed outside Moscow are believed to have been residents of the region that was the plane's destination
10:03AM ( 27 minutes ago )
US women rally to beat Finland 3-1 in Olympics opener
The United States women's hockey team rallied to beat Finland 3-1 to remain perfect when opening an Olympic tournament
10:00AM ( 29 minutes ago )
Robert De Niro takes aim at Trump's climate change policy
Hollywood start Robert De Niro took aim at the Trump administration's stance on climate change, telling a packed audience in the Middle East that he was visiting from a "backward" country suffering from "temporary insanity."
9:58AM ( 31 minutes ago )
Surprise! Gleirscher wins, Mazdzer medals, Loch's reign ends
Sliding stunner: Austria's David Gleirscher wins Olympic luge gold, Chris Mazdzer gives the U.S. a silver, and Felix Loch's reign comes to an end
9:58AM ( 32 minutes ago )