An Economy of Fear

What's wrong with the economy and the market right now? A lack of credit? A lack of buying power? Nope, I think it's a lack of confidence about tomorrow. Poll after poll shows people fairly sanguine about their current financial situation but worried about what's coming next because of the housing downturn, the subprime mortgage mess, and rising oil prices.

The whole environment reminds me of the pessimistic period right before the liberation of Iraq back in 2003—and right before a great four-year run of rising stock prices, rising incomes, and rising job growth. (All despite a quadrupling of oil prices. Wow.) Take that supposedly weak retail sales report from yesterday. As even the bearish gang at Goldman Sachs notes:

Although the December retail sales report fell slightly short of consensus expectations, the official figures still show only a modest slowdown in consumer spending growth. On a year-on-year basis, sales still look significantly stronger than in March 2001, the start of the last recession. Since that recession did not include even a single quarter of contraction in real consumer spending, one might conclude that U.S. consumption is still very far from the outright contraction that we expect for the second and third quarter of 2007.

Now I don't want to cherry-pick data or deny the economy has weakened since the third and fourth quarters. And Goldman points out that there are plenty of other indicators that show the consumer is "significantly" weaker than at the start of 2001. The Federal Reserve is certainly worried enough that it may pull the trigger on a half-percentage-point rate cut earlier than its scheduled meeting at the end of the month. Probably a smart insurance policy.

And with every passing down-tick on the Dow, I grow ever more sure that the White House and Congress are going to agree on a fiscal stimulus bill that will, at least according to most economists I talk to, provide little boost to the economy and come too late to help, anyway. Plus we have months of presidential campaigning to look forward to, with commercial after commercial telling us how much trouble America is in and how candidate X has the solutions.... Wait, now I'm starting to get worried, too.