Can we dodge a recession? Many consumers feel poor

Bob Lubell, owner of Grand Lubell Photography in Sylvania, Ohio, notes that consumers were already hesitant before the past few weeks. Weddings are being booked weeks, not months, in advance. Brides and grooms are cutting a few corners, driving their own cars rather than taking limos, having more casual rehearsal dinners and forgoing pricey cakes. Twice recently he's seen cash bars, something generally unheard of at weddings he's familiar with.

He's concerned that what has happened in the past few weeks will cause consumers to feel "emotional loss" even if it does not affect their pocketbooks directly. That may lead them to cut back further. "I fear very difficult times ahead," he says.


Wall Street's problems could hit Main Street in several ways:

•Confidence. Government bailouts, wild stock market swings and companies going under beget worrisome headlines. "I don't know how we get through this without a significant psychological blow," says Moody's chief economist Mark Zandi. He says wealthier consumers who watch the stock market are likely becoming less confident. The same is true for older Americans who have seen rates on certificates of deposit drop significantly from last year.

Although the Conference Board reading of consumer confidence ticked higher recently, it still was far below the level seen a year ago heading into this month's financial frenzy. Consumer spending accounts for more than two-thirds of all U.S. economic activity. Even before the recent market events, consumer spending was slowing. Two retail groups last week predicted the holiday shopping season would show the smallest gain in sales since 1991. If spending were to actually decline this quarter or next, it would be the first time since 1991, when the U.S. economy was in a recession.

Business confidence also might take a hit, making companies less willing to invest and hire, Zandi says.

Xerox CEO Anne Mulcahy says U.S. businesses have generally been hesitant in decision-making, and recent market events mean that hesitancy will likely last longer than earlier expected.

"What you do have is a very nervous business environment in the U.S.," she says.

•Wealth. Despite a powerful rally on Wall Street late last week, investors are still sitting on massive losses — some of them on paper — as the result of the ongoing bear market.

The S&P 500 is still 20% below its high of 1565.15 on Oct. 9, 2007. That means it's still in bear market territory, unofficially defined as a 20% or more decline.

"What we've seen happen is a massive loss of wealth. That's important, in that it now says equities are right there alongside housing prices in eroding household net worth," National City economist Richard DeKaser says.

The Federal Reserve said last week that U.S. household net worth fell in the quarter ended June 30 to the lowest since 2006 as the value of Americans' real estate and stocks dropped, and their bank accounts shrank. When consumers see their wealth decline, they are more likely to try to save money and hunker down.

•Credit. Anxiety in financial markets means banks will likely be even more cautious when it comes to making loans.

"There's just too much of a cold shower out there to expect anything but tighter credit conditions now," says Brian Bethune, director of financial economics at Global Insight.

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