A Week Of Near-Calamities Erodes Confidence
When Moody's downgraded the credit ratings of most major U.S. banks on Thursday, you'd have thought Friday would be a tough day for bank stocks.
But bank stocks ticked up — largely because investors were relieved. They had feared the downgrades would be worse. The Dow Jones industrial average was recovering from Thursday's 250-point drop, the second-worst of the year.
And that's the kind of week it was: lousy, but not as bad as it might have been. The euro didn't collapse, bank stocks didn't crash, and the Federal Reserve's policymakers didn't do or say anything unexpected at the end of their gathering on Wednesday.
For consumers and business owners, a week of weaving around potential calamities was not exactly a confidence builder.
"There's an overall sense of frustration," Paul Root said in a phone interview. He and his wife, Jennifer, own Diablo Kennels in Bay Point, Calif. After 22 years in business as a dog groomer and kennel operator, he's struggling to survive in an economy characterized by unrelenting rounds of credit downgrades, market volatility and political paralysis.
For his small business to flourish, he needs his customers to feel confident enough to go on vacation and leave their dogs behind for a bath at the kennel. But the confidence just isn't back yet, he said.
"We've become a luxury in hard times," he said. Instead of planning trips, his customers remain wary and watchful. "They're confused. They're scared," he said.
Those worries are reflected in readings of consumer confidence. The Thomson Reuters/University of Michigan index of consumer sentiment dropped more than expected, to 74.1 in June from 79.3 the previous month.
Consumers have good reason to feel uneasy. Each day, they get hit with news about rising risks over big slowdowns in Europe and China. And in this country, job growth has been slowing, with employers adding just 69,000 jobs in May — a sluggish pace.
Bank downgrades, weak consumer confidence and feeble employment growth do not combine to create a healthy environment for U.S. manufacturers, according to Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation.
As far as consumer spending goes, "there's zero prospect of that growing" in such conditions, Meckstroth said.
And just as U.S. consumers are backing away from shopping, exports to Europe are slowing and U.S. corporations are becoming less willing to invest in equipment, he said.
"That's the impact of all the uncertainty surrounding Europe and the financial system," he said.
And another big wet blanket is the congressional stalemate over major decisions involving taxes and spending. "That's a self-inflicted wound," he said.
Meckstroth predicts the many worries will linger because all are tied to very complicated political problems, both in Washington and in Brussels. Americans can expect many more weeks like this one, where the good news is simply that the worst didn't happen. "I don't see anything that is going to break this cycle," Meckstroth said.