Stock Market Plunge May Speed Next Recession, Economists Say

Like an unexpected freeze that brings on an early winter, the stock market’s collapse threatens to choke off the nation’s economic recovery sooner than expected and has increased the odds of a recession next year, economists said Monday.

“I think you’re looking at the first quarter of 1988,� predicted Larry J. Kimbell, director of business forecasting at UCLA. He added, however, “If that’s the extent of the damage, that’s not too bad. It (a recession) is something we see every 3 1/2 years.�

While stopping short of predicting a downturn in 1988, Kathleen Cooper, chief economist at Security Pacific National Bank, added: “This has to make you worry that a recession will come sooner than 1989, that it will come next year.�

Since late 1982, Americans have been reaping the fruits of an exceptionally lengthy economic recovery. Before the recent unsettling events, many analysts had expected the recovery to last through the November, 1988, elections. Only then, according to the conventional wisdom, would the economy sour.

Many doubt, however, that the U.S. economy is dynamic enough to shrug off so extraordinary an event as the stock market’s recent collapse.

While only a minority of consumers dabble in stocks directly, the market collapse nonetheless has sweeping effects. The most visible victims are the wealthy, including many young people, who profited enormously in the recent bull market.

“They have finally made the painful discovery that there’s not only an upside but a downside to the market,� said Fabian Linden, executive director of consumer research at the Conference Board, a nonprofit business research organization in New York. “It’s a reality a lot of them have not encountered.�

But the economic impact of the plunge reaches much more deeply into society. It cuts into the confidence of those whose sense of well-being had been fortified by retirement portfolios that seemed to grow magically during the last several years. It makes business leaders reluctant to spend a lot of money on their companies--the sort of spending that has beneficial ripple effects throughout the economy.

“It causes one to pause and consider--I’m talking about chief executives of companies--whether expansion is desirable, whether they should shave spending a bit,� observed Roger Fulton, an economist with A. Gary Shilling & Co. in New York.

And it even spreads a sense of gloom and caution to those who own no stock whatsoever. “It only makes us more certain that next year will be a recession year,� Irwin L. Kellner, chief economist at Manufacturers Hanover Bank, said of the stock market performance, even before the extent of Monday’s damage became apparent.

May Slow Consumer Spending

The market crash highlights the critically important role consumers have played in the current economic recovery. Consumer spending, which accounts for about two-thirds of all spending, grew annually at rates in excess of 4% from 1983 to 1986. And even before the current economic travails, it had become apparent that the consumer engine was losing its steam.

An unexpected spurt of inflation actually caused real personal income to start shrinking earlier this year. Throughout 1987, consumer debt has stayed at exceptionally high levels, and savings were gauged in the paltry range of 2% of income.

“So you’re not talking about a very strong consumer to start out with--and when you put this on top of that, it has to affect discretionary spending,� Fulton observed.

While nobody suggests that a decline in consumer spending alone will plunge the nation into a recession, economists agree that it would be an important factor in bringing the recovery to an end.

“Consumer spending really was one of the key factors in keeping the recovery going,� said Sandra Shaber, an economist with the Futures Group in Washington, adding: “I don’t think that it will collapse enough to pull the economy into a recession--but it’s another negative.�

And while nobody can predict with certainty when a recovery will end and a downturn will begin, it is obvious that Monday’s events will put a sharp chill on economic activity, at least for the short term.

“If I were a businessman, I would postpone as many expenditures as I possibly could,� said David Butz, an assistant professor of economics at UCLA. “And as a consumer, I plan to postpone as many expenditures as I can until this uncertainty is resolved. To that extent, recessions are self-fulfilling.�

“You have to believe it’s going to be very adverse for the near term,� said Kimbell, the forecaster. “Business and consumer plans will grind to a halt--at least until they see if this is a passing thing.�

Many experts are concerned because the stock market collapse is only the most dramatic evidence of vulnerability in an economy that has grown unstable for other reasons. The financial community fears higher interest rates and inflation because of the Reagan Administration’s policy of maintaining a low dollar. Moreover, the persistent trade deficit suggests to many that the low dollar, which raises the price of foreign products in the United States, will have to fall further.

‘Symbolizes Negative Things’

Also, the huge U.S. budget deficit has made the United States increasingly vulnerable to pressure from abroad to keep domestic interest rates relatively high. This is because the Japanese and other foreign investors play a key role in financing the U.S. debt and could withdraw their money if it doesn’t earn enough interest.

“I think the important thing is that the collapse of the market symbolizes a lot of negative things that have been going on in the economy for a long time,� economist Shaber said.

At the same time, no single event seems to explain the timing--and vehemence--of the market’s sell-off. And that has made the situation especially unsettling to the experts.

“Something has simply got to turn the psychology around, and it’s not clear to me what’s going to do it,� said Security Pacific’s Cooper. “It’s simply a very scary situation--the degree of this decline is not explained by logic.�