Jitters about slowing economy push stocks lower

McClatchy NewspapersAugust 2, 2011 

WASHINGTON — The longest decline in stock prices since the nation's financial crisis started in 2008 has investors worriedly watching new economic indicators expected this week for signs that the economy is slipping back into recession.

Stocks plunged Tuesday, despite Congress' final approval of a deal that avoided what would have been a devastating default on the nation's debt. The financial markets looked past the closing act of political theater to the real and present danger of a slowing economy and worsening economic problems abroad in Spain and Italy.

The Dow Jones industrial average tumbled 265.87 points, or 2.2 percent, to close at 11,866.62. The decline marked the eighth straight day of losses, the longest continuous stock slide since October 2008, when the U.S. financial crisis was at full throttle. The S&P 500 shed 32.89 points, or 2.6 percent, to its lowest close of the year at 1254.05.

Whether the slide continues depends on several key economic indicators. On Wednesday, two key economic reports will be made public: activity in the services sector and the ADP National Employment Report, which often anticipates the Labor Department's report on hiring and unemployment, which comes out Friday. Thursday will show whether last week's drop in first-time jobless claims was an aberration or the start of stronger hiring.

What most spooked the markets Tuesday, however, were dismal government statistics on income and consumption. Personal spending fell 0.2 percent, the first such drop in nearly two years. Wages and income were flat in June, the Commerce Department said, and consumers upped their savings rate from 5 percent to 5.4 percent. Usually that would be a good thing, but in an economy stuck in neutral, it's consumption, not savings, that's needed to spark hiring.

"This is another dismal report on the consumer side of the economy. Consumer mood is at depressed levels and those households that are not living paycheck to paycheck are saving more," Chris Christopher, a senior economist at forecaster IHS Global Insight, wrote in a note to investors. "This is considerably worrisome, since we are a consumer-oriented economy."

Weak auto-sales numbers for July also were troubling investors. The poor consumption and auto numbers came on the heels of Monday's survey of purchasing managers, with a key index showing a sharp drop in manufacturing activity to levels barely above economic contraction.

Those grim numbers followed Friday's worse-than-expected economic growth numbers for the second quarter, which ran from April through June. The economy grew at an annualized rate of just 1.3 percent over those three months, with government statisticians sharply revising estimates from January to March down to just 0.4 percent growth.

It all points to an economy that's losing steam at a dangerous clip. The chief economist for the influential U.S. Chamber of Commerce, Martin Regalia, described the U.S. economy — growing at an annual rate under 1 percent this year and just 1.6 percent over the past 12 months — as "about as weak as you can get without going into a recession."

In an interview, Regalia said the danger with such slow growth was that a hurricane or an oil price shock could tip the economy from growth to contraction.

"When you are growing that slowly, almost anything can tip the balance," he said, adding that "the normal kinds of things that would cause variation in . . . growth could actually cause a drop-off to a point where you could be looking at an actual recession."

Regalia and other economists aren't predicting that, instead expecting growth to reaccelerate from October through December as numerous economic head winds ease, including the uncertainty over the debt default threat by Congress, politics that created a self-inflicted wound to the economy.

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Personal income and consumption report

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