Are we heading for a double-dip? Analysts weigh in
Six weeks ago, Dennis Hoffman pegged the chance of a double-dip recession at near zero.
Hoffman, professor of economics at Arizona State University's W.P. Carey School of Business, said Monday he's revising those chances in the wake of the Dow shedding 1,147.52 points over the past two business days."
"It is a reflection of rapidly eroding confidence in the economy," he said.
The Dow cut 512.76 points Friday and shed another 634.76 points Monday, helping Wall Street to its worst day since the 2008 financial crisis.
Since Friday, the Nasdaq cut 311.4 points and the S&P 500 fell 140.19.
Late Friday, the Standard & Poor's Rating Services downgraded long-term U.S. government debt from AAA to AA+.
S&P went on to downgrade the credit ratings of Fannie Mae and Freddie Mac, farm lenders, long-term U.S. government-backed debt issued by 32 banks and credit unions and three major clearinghouses used to carry out stock trades, bonds and options on Monday, according to The Associated Press.
While Hoffman declined to give an exact percentage on the likelihood of another recession, he said recent events such as a downward revision in the Gross Domestic Product, European economic concerns and the inability for federal lawmakers to take a meaningful step toward debt reduction are fueling his apprehension.
"We're not that far from recession territory," he said. "Now what we've got is rapidly eroding wealth right in front of people's eyes and that clearly makes them seize up and hesitate to spend, which is of course the last thing we need right now."
Hoffman said that when people start losing their faith in the economy, things tend to slide downhill.
"When confidence is shaken, people freeze up, businesses freeze up, expenditure decisions are put off, capital investment decisions are put off, any kind of hiring plan is put on the shelf and unfortunately you tend to spiral down," he said. "That's what we observed in 2008 and that is obviously some of the fear that is going on this time."
Michael Bacigalupi, a certified financial planner with Wealth Management Concepts in Prescott, said the past couple of days are a clear statement on federal lawmakers' inability to address the near-term economic problems and deal with the nation's long-term debt problems.
"Yes the (S&P) downgrade is not a good thing, but I think as far as the bond market was concerned today, there was no proof that the downgrade hurt our standing as still the predominant nation where people put their money for safety," he said.
Bacigalupi said the frustration is set around the lack of direction and lack of confidence without an economic plan from all levels of government.
"I think what you're seeing here is with the S&P downgrading our debt, you're just seeing a confirmation that that really was just not a valid process as the way it was handled," he said.
The message is clear, according to Bacigalupi: "As the market is looking out, as it always does, it's saying (that) until you guys (federal lawmakers) can get together and get something that's meaningful and significant, we're going to basically throw this mandate in your face, we're not going to have confidence."
For now, Bacigalupi suggests that people investing in things like stocks and mutual funds, either be able to leave that money alone for three or four years or get out. He also recommends that people have at least nine to 12 months of cash to fall back on for emergencies.
What the stock market drop means to Arizonans is still playing out.
Ronald Gunderson, professor of economics at the W.A. Franke College of Business at Northern Arizona University, said via email that the impact on the state and local communities will not show up as fast as what's happening in the markets.
Gunderson said the primary impact is likely an overall dip in tax revenues and a stagnant employment picture.
"Until the unemployment rates begin to subside, uncertainty among households will further dampen spending, which ultimately results in fewer sales tax dollars collected by state and local governments," he wrote.
Hoffman said the key is restoring people's belief in the economy.
"We just have to get through this, but the challenge I think is going to be finding that magic ingredient that is going to help build confidence on the part of business and build confidence on the part of consumers," he said.