WASHINGTON What little confidence consumers have is being undermined by the tumult on Wall Street.
Americans struggling with lean wages and job insecurity have seen their 401(k) accounts shrivel over the last 2½ weeks. A plunge in oil prices has provided some relief at the pump, but not enough to ameliorate anxiety about the overall economy.
When consumers feel less wealthy, theyre less likely to buy new furniture, new appliances or new cars. And because their spending drives about 70 percent of the economy, analysts fear a negative feedback loop in which markets and consumers drag each other down.
Well just scare ourselves into a recession, says David Kelly, chief market strategist with J.P. Morgan Funds.
Murray Specktor, 58, a retired Northwest Airlines pilot, says he has enough money tucked away to support himself. But with the Dow Jones industrial average more than 11 percent lower than it was less than three weeks ago, hes taking further precautions.
No expensive meals out, he says. Entertainments going to get cut back. Until I see where this is going, Ive just got to preserve capital and try to get my comfort level up.
The drop in the stock market could cut overall spending by $140 billion, or 1.3 percent, over the coming year, says Paul Dales, senior U.S. economist at Capital Economics. Dales forecasts that the stock market turmoil could reduce the economys annual growth rate by half a percentage point through 2012.
There isnt much to spare. In the first half of the year, the economy grew at a scant 0.8 percent annual rate. That helps explain the dive on Wall Street: Stocks are falling partly on fears that the nation could slip back into a recession.
Tumbling stock prices could especially depress spending by wealthier consumers. Eighty percent of stocks belong to the richest 10 percent of Americans. And the richest 20 percent represent about 40 percent of consumer spending. Luxury retailers that have helped sustain the economy could suffer.
Even before stocks began dropping last month, consumers werent exactly exuberant. In June, they reduced spending for the first time in 20 months. The Rasmussen Consumer Index, drawn from a national survey, found Monday that 70 percent of Americans think the economy is worsening. Thats up from 45 percent at the start of the year.
The stock-market drop means people will put off spending decisions, particularly for large-ticket items, and that will ... reduce growth, says Brian Gendreau, a market strategist with Cetera Financial Group and a finance professor at the University of Florida.
Rob Stein, senior portfolio manager at Astor Asset Management, worries that the stock market could remain depressed for months and hurt sales during the crucial holiday season. Still, he holds out hope.
Usually, slowdowns based on market movements are temporary, Stein says. Just like high gas prices, you get used to it.
A lot of investors arent waiting to see what will happen in the stock market: Theyre shifting money from stocks to bonds in their 401(k) accounts. On Monday, investors in the 4.7 million 401(k) monitored by consultant Aon Hewitt transferred $1.6 billion from stocks and into fixed-income investments. On a typical day, investors move $300 million to $400 million.
Families are getting some relief because gas prices are about 30 cents a gallon cheaper than they were at the start of the summer. But the benefits are tempered by the context in which these price declines come: fear of a weakening economy.
James OSullivan, chief economist at MF Global, takes some comfort in what happened last year. Stocks plunged 14 percent between late April and early July on fears about Europes debt crisis.
The economy lost a bit of momentum, but it didnt go into recession, and it accelerated again before the end of the year, OSullivan says.