Will stock plunge hurt economy? Depends how long it lasts
WASHINGTON — 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 highrisk 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.