Plunging Dow, consumer confidence: signs of 'double dip' recession?
Investors worldwide have grown more cautious about the outlook for the economy and corporate profits.
Worries about the global economy are showing up in sagging stock prices, a plunge in US consumer confidence, and an investor flight to safe-haven Treasury bonds.
The underlying concern is a simple one: Does the economic recovery have staying power, or is the risk of a double-dip recession rising?
Even though many economists see continued expansion ahead, investors have grown more cautious about the outlook for the economy and corporate profits. The Dow Jones Industrial Average fell about 2 percent in morning trading Tuesday, with the index dipping below 10,000. In April, by contrast, the Dow stood above 11,000.
- An index of US consumer confidence fell sharply in June, the Conference Board reported Tuesday. Consumers in the survey gave more downbeat views of both their "present situation" and their outlook for the future, sending the overall index to 52.9, down from 62.7 in May. For comparison, this index was at 100 in the baseline year 1985.
- The Shanghai Composite stock index fell 4 percent Tuesday as a leading economic indicator for the Chinese economy was revised downward. This indicator, also released by the Conference Board, still projects growth in China. But the pace could cool as the nation struggles to maintain momentum while also letting air out of a real estate bubble.
- In Europe, concerns persist about how the Continent will manage its sovereign-debt problems. Stocks fell Tuesday there, also, and Europe's woes highlight a challenge that's global in scope: How to stimulate growth while not adding to debt burdens.
"The sovereign debt crisis in Greece is clearly jeopardising Europe’s nascent recovery from the deep recession," the Bank for International Settlements said in its annual report released Monday. The bank said such unresolved problems in the world economy "threaten to short-circuit the recovery."
This doesn't mean that a relapse into recession is the most likely scenario.
But even a cooling in growth makes it harder for the economy to create new jobs. Economists are expecting a report due Friday to show that the US economy lost jobs in June, after five months of gains.
"We share the view that the economy is strengthening, that we are into recovery," Mr. Obama said Tuesday. But he added, "we’re now seeing some headwinds and some skittishness and nervousness on the part of the markets and on part of business and investors. And so we’re still going to have to work through that."
One prominent forecasting firm, IHS Global Insight in Lexington, Mass., sees a 20 percent risk of a double-dip recession for the world economy. In a report last week, the firm predicted that the US economy will grow 3.4 percent this year, slowing to 2.8 percent in 2011. Its forecast for global gross domestic product (GDP) growth is 3.8 percent this year and 3.6 percent in 2011.
For now, the US government is receiving one benefit from investors' heightened focus on economic risks: Money has been pouring into US Treasury bonds, as a "flight to safety" trade.
That is keeping borrowing costs low for the Treasury, even though the US has its own sovereign-debt challenge to confront at some point. The interest rate on 10-year Treasury notes (which falls when bond prices rise) has plunged from about 4 percent in April to below 3 percent Tuesday. That's its lowest level since early 2009, when policymakers were still trying to quell the US financial crisis.