Recession fears becoming self-fulfilling prophecy

WASHINGTON—It’s the last thing a nervous consumer and a fragile economy needed: a confidence-killing nosedive on Wall Street.

Americans struggling with lean wages, job insecurity and high gasoline prices have seen a 15-percent plunge in stock prices shrink their retirement accounts over the past 2 1/2 weeks.

When consumers—the linchpin of US growth—feel less wealthy, they are less likely to buy new furniture, new appliances or new cars. And their spending drives about 70 percent of the world’s No. 1 economy.

The drop in the stock market could cut overall spending by $140 billion, or 1.3 percent, over the coming year, said Paul Dales, the senior US economist at Capital Economics. He forecast the stock market turmoil could reduce the economy’s annual growth rate by half a percentage point through 2012.

There isn’t much to spare. In the first half of the year, the economy grew at a scant 0.8-percent annual rate. That helps explain the dive on Wall Street: Stocks are falling partly on fears that the nation could slip back into a recession.

David Kelly, chief market strategist with J.P. Morgan Funds, said the market drop would become “a self-fulfilling prophecy … and we’ll just scare ourselves into a recession.”

Monday’s disastrous day on Wall Street reaffirmed what many companies and ordinary Americans have been fearing for weeks: This is too tumultuous a time for businesses or households to be contemplating expansion.

“Everybody gets into this hangdog demeanor with respect to economic expectations,” said Paul Laudicina, chair of A. T. Kearney, a consulting firm. “People sit on their wallets because they feel like everything is going to get worse, and things get worse because people are sitting on their wallets.”

The nerve-racking situation that has put pessimists in ascendance got its statistical impetus late last month, when the government reported that the economy had grown much more slowly than originally thought during the first half of the year. Reports from New York Times News Service and AP