Behind Market Swings: Growing Recession Fears

There are many factors churning up market volatility and contributing to a frightening stock market sell-off, but chief among them is growing fear of a new recession.

With growth averaging less than 1 percent in the first half of the year, the U.S. economy is already perilously close to recession. But until the past few weeks, most economists had been forecasting a convincing pickup in the second half.

But a string of ominous economic data, showing that an already weak recovery in the U.S. may be stalling out, has led many economists to downgrade their forecasts. And now some are growing concerned that the financial market turmoil itself will further sap consumer and business confidence in a vicious cycle that will end in recession.

The growing concerns have destroyed trillions of dollars in investor wealth, taking the broad Standard & Poor's 500 down more than 16 percent in less than a month. The Dow Jones industrial average, which lost 4 percent this week, has moved more than 100 points in 10 of the past 14 sessions.

"The recent slowdown was initially blamed on the Japanese earthquake and higher oil prices," said Kevin Caron, a portfolio manager at Stifel Nicolaus."Now as we move into September, because of the disruptions we've seen in the financial markets in August, I wouldn't be surprised to see the data for September coming in weak as well."

Most economists still believe the U.S. will skirt another recession. That view is based at least in part on historic efforts by the Federal Reserve to pump money into the financial system and drive interest rates to the floor. The policy, which the Fed intends to continue for the next two years, is designed largely to offset losses to banks and households from the ruinous lending binge that brought down the housing market.

The strategy is working, New York Fed President William Dudley said Friday, who referred to a "slow convalescence" in household finances and banking system help. And a recent Fed survey confirmed that bankers are increasingly willing to lend.

But cheap, widely available credit hasn't yet produced the expected effect of boosting spending and growth.

"We have filled the gas tank; we've got lots of fuel in there," said Dallas Fed president Richard Fisher. "Someone needs to step on the pedal and engage the transmission mechanism."

Consumers and businesses are proving reluctant to do so. Last month's debt ceiling deadlock left a cloud of uncertainty and damaged confidence, especially after Standard & Poor's downgraded U.S. sovereign debt below AAA for the first time.

Over the past week, fresh reports have heightened worries that another recession may be looming. Even as mortgage rates have fallen to record lows, sales of existing homes continued to drop in July and sellers reported an uptick in contract cancellations.

Two separate regional reports showing a slowdown in manufacturing, threw cold water on hopes for one of the few sectors that has contributed to growth since the recession ended two years ago.

Big banks have responded by cutting their forecasts for growth for the second half of the year and 2012. Citigroup, JPMorgan Chase and Wells Fargo all published new, lower GDP estimates Friday. Citigroup cut 2012 growth forecast to 2.1 percent from 2.7 percent, while Wells Fargo sees growth next year of just 1.1 percent, down from a previous view of 1.9 percent.

JP Morgan Chase expects now sees GDP up just 1 percent in the fourth quarter, instead of the 2.5 percent previously forecast.

All those figures technically would avoid recession, although private-sector economists are typically highly reluctant to forecast so-called negative growth.

As growth forecasts are falling, so are hopes that the government can provide meaningful remedies with the traditional tools of fiscal and monetary policies.

President Obama has promised to unveil new proposals in early September to get the economy moving again. But the partisan gridlock in Washington will make substantial proposals all but impossible to enact before year-end, when Congress is set to vote on a deficit-cutting package worked out by a special committee of 12 legislators.

No matter what agreement is reached, consumer spending will likely take another hit early next year unless Congress extends a payroll tax cut and approves another extension of unemployment benefits. Goldman Sachs economists estimate the failure to continue those programs would cut 2012 GDP by roughly $270 billion - or about 1.7 percent. With projected growth at 1-2 percent, that in itself could be enough to tip the economy back into recession.

There also appears to be little more the Federal Reserve can do to spur growth. The central bank's recent pledge to keep short-term borrowing rates at near zero until at least mid-2013 may have made matters even worse, according to Fisher, who was among three Fed policymakers who voted against the move.

"Now you know that you can wait to borrow because the rates are going to be locked in and be locked in at very low levels for a two-year period," he said. "So one of my arguments was that this might well further retard recovery and commitment."

Going global?
This month also brought signs that the economic slowdown may be going global. European GDP barely budged in the latest quarter, as consumers there remained shaken by the continuing stalemate over debt problems and Greece, Spain and Italy.

This week, investors bailed out of European banks stocks as fears spread that some may not have enough capital to withstand losses from their government debt holdings. Those fears worsened after a meeting between French president Nicholas Sarkosy and German chancellor Angle Merkel failed to bring a hoped-for solution.

Their pledge — to work toward closer coordination of European government budgeting and borrowing — only highlighted worries that European regulators are ill-prepared to handle the failure of one or more banks.

"If there's a problem in the U.S. bank, within about a week, the (Federal Deposit Insurance Corp.) is on it, taking over the bank, taking care of everything, "said Sean Egan, president of the independent bond research firm, Egan-Jones Ratings. "You don't have to worry about it. In Europe you don't have that because of the political structure."

This month's stock market sell-off has inflicted trillions of dollars worth of losses on households, investors, pension funds, banks and other financial institutions. Those abrupt, wrenching losses add further strains to a global finance system still recovering from the Panic of 2008.

The latest panic has also left American businesses and households badly shaken. Many have been calling their brokers, and investment advisors like Carter Worth, at Oppenheimer Asset Management, with orders to "abandon ship."

"I said, 'What ship are you talking about? The ship is at the bottom of the sea here,'" he said. "This thing just collapsed. Usually you have time to get off the boat."

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  • by Tea Party Member Location: NC on Aug 21, 2011 at 07:49 PM
    Invest in China? The Hong Kong Stockmarket does not care about the American Tea Party. It is not even in their Business news to those investors. Why a guess they invest in China. They do not have a Obama as their Leader. We hope American will be rid of Obama and a great deal of corrupt Democrats in 2012. We just don’t know if there will be anything left of America after Obama!
  • by uh Location: Greenville on Aug 21, 2011 at 12:06 PM
    The ending to this story is troubling. The emotional selling that happens during a recession is exactly what causes recession and prolongs it. That "ship is at the bottom" statement should be the signal to buy, not sell.
  • by Wolfgang Location: Chocowinity,NC on Aug 21, 2011 at 10:00 AM
    Not '1' business artical from Zacks , Motley Fool , MSN Money and all the rest. Never mentioned once anything about the Tea Party is to blame for this finacial nightmare. It is all Dem Lib propaganga. The party line Sieg Heil!
  • by Just Facts on Aug 21, 2011 at 06:42 AM
    A CNN poll found that John Boehner’s approval rating has fallen off a cliff. In July, Boehner had a 43% favorable rating and a 32% unfavorable rating, (net 11). After the debt ceiling debacle the numbers have reversed. Boehner now has a 33% favorable rating, and 40% unfavorable rating. The Speaker of the House has gone from a plus eleven to a net minus seven. That is an 18 point negative swing in one month. In contrast, Democratic leader Nancy Pelosi has one from a 35% approval rating to 31% approval rating, and a her disapproval rating moved down a point from 52% to 51%. The loss for Pelosi was only a net three points. Senate Minority Leader Mitch McConnel didn’t fare much better than Boehner. McConnell’s favorable rating dropped from 27% to 21%. His unfavorable rating grew from 32% to 39%. In July McConnell’s net favorable rating was at a (-5), today his net negative is (-18). McConnell suffered a net thirteen point negative swing in a month.
    • reply
      by Wolfgang on Aug 21, 2011 at 09:21 AM in reply to Just Facts
      A Communist News Network Poll cut me a break!. Who did they poll people at a Democrat Liberal dinner party?
    • reply
      by The source on Aug 21, 2011 at 09:29 AM in reply to Just Facts
      look at the source from which you are getting your FACTS, proof positivie they are not facts at all!!
    • reply
      by Anonymous on Aug 21, 2011 at 10:10 AM in reply to Just Facts
      That's because HE GAVE IN !!! The purpose was to NOT RAISE THE DEBT CEILING, in that reguard he FAILED !
  • by Jackie B on Aug 21, 2011 at 06:33 AM
    By being reasonable and trying to make a deal, Democrats have emerged from this mess looking better in the eyes of potential 2012 voters. The combination of the Republican desire to cut Medicare combined the the Democratic fair share argument on taxation could create a powerful 2012 message. A new USA Today poll revealed huge potential for another wave election in 2012. Obama’s approval ratings show that he is in a better position than any of the other Washington components to survive a big wave. The American people aren’t as dumb as the GOPs thinks they are. The high profile near default, and subsequent debt downgrade opened a lot eyes in this country. Those people now know who to blame for the nation’s current mess, and they are placing the majority of the blame on the Republican Party.
  • by Carl Location: Bath on Aug 20, 2011 at 10:16 PM
    The Obama Zombies have to blame the Tea Party. It is the party line. Like you are racist if you do not like Obama's politics. Then they revert to name calling. This will still go on and on that is all they have left. Looks like Carter is off the hook as being America's worse President.
    • reply
      by Anonymous on Aug 21, 2011 at 04:54 AM in reply to Carl
      The Obama Zombies?? name calling, you just shot yourself in your own foot.
      • reply
        by Anonymous on Aug 21, 2011 at 08:34 AM in reply to
        Well, WITN won't allow us to call them the names we REALLY want to. LOL
  • by Omar Location: NC on Aug 20, 2011 at 08:59 PM
    Wolfgang you are right all the World's Stock Markets in every Nation could care less about the American Tea Party. Most people do not know how money works. Gold has gone way up in price. As you know I am sure.
    • reply
      by TALK ABOUT IDIOTS on Aug 21, 2011 at 06:49 AM in reply to Omar
      I want to see ads showing the stock market tanking, with Boehner’s voice over “I got 98% of what I wanted, so yeah, I’m pretty happy”.
  • by Wolfgang Location: Chocowinity,NC on Aug 20, 2011 at 05:56 PM
    AP Business Writers - Funny the Tea Party was never mentioned NEW YORK (AP) — A growing belief that the U.S. economy is headed toward recession gave the stock market its fourth straight week of losses. The anxiety in the market was obvious Friday as the major indexes went from modest gains early in the day to another sharp loss. The Dow Jones industrial average had its 10th move of more than 100 points this month. "We just don't know whether we're going to have a recession," said John Burke, head of Burke Financial Strategies. There was little news to help investors determine their next moves. JPMorgan Chase&Co. joined other financial firms and cut its forecast for economic growth during the fourth quarter. It's now predicting growth of 1 percent, down from an earlier forecast of 2.5 percent. That added to the recession fears. Investors reacted to the news from late Thursday that Hewlett-Packard Co. was planning to exit most of its consumer businesses, including PCs. HP fell 20 percent to a six-year low as investors showed their misgivings about its plan to transform itself into a company that caters to corporations. The market rose in early trading, but some investors did not want to take the chance of holding stocks if bad news came out of Europe over the weekend. So they began selling during the afternoon. European investors were also cautious — banking stocks fell near two-and-a-half-year lows, dragged down by rumors about banks' potential losses on bonds issued by heavily-indebted governments. "These things usually break out over the weekend and then you have a mad dash Monday to react to them," said Mike McGervey, the head of McGervey Wealth Management
    • reply
      by Cindy on Aug 20, 2011 at 09:47 PM in reply to Wolfgang
      I bet all these people who blame the Tea Party never bought a Stock in their life. Or know how to buy or sell a stock. I do I have a Scottrade account.
    • reply
      by Anonymous on Aug 21, 2011 at 05:00 AM in reply to Wolfgang
      Hows that 98% working out for you?
    • reply
      by GOP/TEA to blame on Aug 21, 2011 at 05:11 AM in reply to Wolfgang
      A Standard & Poor’s director said for the first time Thursday that one reason the United States lost its triple-A credit rating was that several lawmakers expressed skepticism about the serious consequences of a credit default — a position put forth by some Republicans. S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” Mukherji said. “That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”
      • reply
        by James on Aug 21, 2011 at 07:18 AM in reply to GOP/TEA to blame
        So one individuals quote sets everything right for you ? What you seem to forget is that the original TEA party is why America EVEN EXISTS as it is today, with the freedoms you enjoy, the lifestyle we all live. But left alone, obama and his followers would turn this country right back in to jolly ole England. Personally I don't want that and will do all that I can to prevent it. Enjoy your freedom to express your thoughts FREELY. Have a wonderful Sunday.
    • reply
      by Just a Clown Show on Aug 21, 2011 at 06:34 AM in reply to Wolfgang
      The grand Republican plan has always been to keep voters angry until the 2012 election by keeping the economy in the dump. It worked. The American people are angry. What the GOP brain trust never counted on was that the American people would be angry and blame them.
      • reply
        by Obama Snake Oil co on Aug 21, 2011 at 01:43 PM in reply to Just a Clown Show
        Koolaid is on sale at Wallyworld...drink up!
  • by voter Location: nc on Aug 20, 2011 at 03:48 PM
    obama will handle it all with his newest backdoor law;
    • reply
      by voter on Aug 20, 2011 at 05:42 PM in reply to voter
      hey clint, obama has also addressed the illegal immigrant issue too.
      • reply
        by clint on Aug 21, 2011 at 04:34 AM in reply to voter
        Like I said. He's gotta go. Obama "One and Done" Count on it!!!
        • reply
          by voter on Aug 21, 2011 at 09:35 AM in reply to clint
          assuming there is an election in 2012. if martial law is in effect, he's there forever. that could be the plan of the vacationer in chief.
  • by Clint on Aug 20, 2011 at 03:15 PM
    Have mercy, it is so simple. Stop spending so much, don't tax too much, ease up on the stupid regulations and develop a reasonable domestic energy policy. So there..Economy solved. Next step seal the borders and decide, reasonably, what to do with the illegals already here. Then decriminalize drugs. I'm no druggy but daggone it prohibition ain't workin! Forget the dang abortion issue! God will deal with that at a later date. Workfare! You be collectin then you be workin...Unless you're disabled you can clean up parks, roadways or do any number of other productive things for society. Too simple I know and the GOP is not for all of this either. No matter they are the lesser evil option at this point. Obamas gotta go. "One and Done" Count on it!!!
    • reply
      by Anonymous on Aug 21, 2011 at 10:13 AM in reply to Clint
      Clint, sounds like Paul Ryan, Rick Perry, Michele Bachmann.... ummm I wonder who will win the next election. Probably not obama. lol Nice post ! It really is that simple. We just need the politicians to Git R Done !
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