Friday, Jul 25, 2008
Shaken consumer confidence could sink the global economy -- but not if we all spend enough at the mall.
Sep 12, 2001 | Is the attack on the World Trade Center the worst possible news for an already shaky economy? Is a "full-blown global recession" -- as Sung Won Sohn, chief economist at Wells Fargo & Co., predicted on Tuesday -- "highly likely?"
Many economists think so. The destruction of one of the preeminent symbols of American capitalism comes at a time when unemployment is spiking up, the markets are depressed and nations all over the world are watching growth rates plummet or disappear. As Robert Litan, an economist at the Brookings Institute, notes, "This is the worst time this could have happened."
But experts are also quick to point out that the attack itself did not significantly damage the nation's economic infrastructure. The flow of capital across the world is unlikely to be disrupted. Oil prices may spike in the very short term, but there is also currently a glut of oil on the market. The dollar may drop and gold may surge -- but in and of themselves, such fluctuations will not determine whether the economy rises or falls.
The single most important factor in predicting what might happen is also one of the most amorphous and indefinable. In the wake of the attack, whither "consumer confidence?"
Technically, consumer confidence is a term used to quantify consumer attitudes about the health of the economy. Practically speaking, it's a measure of their willingness to buy on credit, whether that be houses, cars or DVDs. Consumer confidence is a potent self-fulfilling prophecy: If consumers believe the economy is hurting and stop buying, then the economy will tank -- but if they go to the mall and splurge, it will flourish. And for the last six months, even as growth in the United States has slowed nearly to a halt, consumer spending has continued to be relatively robust.
Now, the horror of the WTC attack is widely expected to challenge consumer confidence more than any other event in recent memory -- more than the Gulf War, the Oklahoma bombing or the collapse of the tech bubble.
"In my book, 'Irrational Exuberance,' I argued that the market was doing so well partly because people forgot that things could go wrong," says author Robert Shiller. "There was no oil crisis, no problems at all. But these things do happen ... People are already having their confidence shaken. This is different than other attacks -- it's a systemic attack."
"I don't think that anything fundamental has been destroyed in our economy," says Steve Golub, professor of international economics at Swarthmore College. "The only thing is the confidence factor."
"Nobody knows what's going on," says Steve Cohen, co-director of the Berkeley Roundtable on the International Economy. "The big potential impact is a slowdown in consumer activity. One reaction that consumers often have to these sort of events [like the Gulf War] is to pull back, either from a lack of confidence or frankly a loss of appetite ... It's not about yesterday's horror, it's that nobody knows what's happening next. When nobody knows, uncertainty leads to very conservative actions on the part of consumers. People buy gold. People put off doing anything. Investors will head to the sidelines. So that's what's in play right now."
"Especially alarming this time around," says Ben Cole, author of "Pied Pipers of Wall Street," "is the much larger fraction of Americans than ever before who invest in Wall Street. So the downdraft on Wall Street could become self-reinforcing to a greater degree than before, leading to lower sales, lesser earnings, and lower Dow again. I do wonder about the long-term mood in Manhattan and NYC. Man, how do you get over this? How many years until a night out on the town in Manhattan can seem carefree and fun?"
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