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

Global markets seeing ‘necessary correction’: IMF chief

WASHINGTON, Feb 11, (Agencies): The tumble in US 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 US 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 US 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.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City. (AFP)

Consumers

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.

Meanwhile, the latest volatility in global financial markets represents “necessary corrections”, IMF chief Christine Lagarde said in Dubai on Sunday, in the wake of a Wall Street plunge.

“The market trepidations that we have seen in the last few days are not worrying me.

“Those market movements were clearly, in our view, necessary market corrections,” she told an audience at Dubai’s World Government Forum.

Wall Street stocks ended a bruising week on a benign note, courtesy of a late-session surge on Friday, while equity markets in Europe and Asia fell sharply in volatile trading.

“I would not focus on what has happened in the last few days. I would focus on the imperatives of change going forward and the need to fix the roof,” Lagarde said.

International Monetary Fund (IMF), Managing Director Christine Lagarde speaks during the opening of the World Government Summit in

Dubai on Feb 11. (AFP)