Thursday's stock market plunge was a reminder that the U.S. economy remains far from the sort of robust recovery that would swell tax coffers and sink unemployment rates. While we feel the need to caution readers that a one-day drop in the Dow of 512.76 points, even on top of several days of losses, can lead to overreactions, there are a few troubling aspects to this development.
One is that markets clearly were unimpressed with how Congress solved its debt-ceiling standoff earlier this week. The nation may have avoided defaulting on its debts, but the crisis clearly was one the politicians themselves manufactured, and the solution did nothing to address the nation's long-term budget problems. As the Wall Street Journal reported this week, even the projected initial cut of less than $1 trillion was based on optimistic, and perhaps completely unrealistic, growth projections. Politicians relied on earlier Congressional Budget Office figures predicting gross domestic product would increase 3.1 percent in 2011 and 2.8 percent in 2012. Given the anemic 0.8 percent growth during the first half of 2011, those figures now look unattainable, meaning the nation's long-term deficit will be higher than expected, and the cuts will trim much less than expected.
Another is that consumer spending is down, as is hiring by private businesses. People are becoming worried about a new recession, and those worries can become self-fulfilling as people and businesses hold onto money. A measure of investment fear over the next 30 days, known as the VIX index, is up 92.6 percent for the quarter that began July 1. This attitude also is evident among investors who sent the price of oil down to $87 a barrel as of Thursday on fears that demand will slow as the economy grinds to a halt.
Europe isn't helping matters. Italy and Spain both may need the European Union to help them out of a crisis soon, further weakening the EU as Germany, England and other relatively strong nations struggle to help the weaker links.
Unlike in 2008, Washington has few ideas for confronting a new slow-down, and virtually no political will to attempt anything even if it had an idea. Those who favor an increase in government spending and an influx of newly printed money to prime economic pumps must confront the fact that those tactics have failed to yield any results. On the other end of the spectrum, those who favor policies that hold tax rates and interest rates low to spur investment must also confront the fact that this, too, has failed to yield results. A USA Today analysis found Americans pay less in taxes as a percentage of income today than at any time since 1950. Meanwhile, despite an increase in corporate profits, much of that money remains on the sidelines.
Both sides would argue for simply increasing their respective strategies, and an argument certainly could be made in favor of less official uncertainty spurred by new financial regulatory laws and health care reform. But political gridlock virtually guarantees that Washington will remain passive.
A further slowdown would ripple through the economy in many ways. State and local governments, many of which already are struggling to balance budgets, would face further challenges with few options other than drastic cuts. Even austere Utah, which has been among the best-managed states, would struggle against demands for education, highways, corrections and other needs.
On the other hand, there is some good news that seems to have been ignored by markets. For example, as a share of GDP, corporate profits are at record highs and second-quarter earning reports continue to be stronger than expected. The past few days may represent only a temporary market correction. That should be everybody's hope.
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