Whipped by the winds of approaching war and recession, Americans prepare for more bad economic news this week as the nation's leaders try to cheer them up and get them back into the stores and back into the stock market.
All eyes are on Wall Street, where blue-chip stocks took more than a 1,300-point pounding in a week of carnage for once-bulging portfolios.
There is faint hope that the bottom might be near after the rapid decline, but few analysts predict a major rally anytime soon. Neither is hope abundant that the economy would bounce back in the foreseeable future, and perhaps not until mid-2002.
New economic indicators this week, including a consumer confidence report by the Conference Board on Tuesday, are expected to bolster economists' view that a recession is at hand.
The gloom that has settled over the economy since the Sept. 11 terrorist attacks is a key factor in this outlook. Some analysts believe that until the country sees some victories in President Bush's war on terrorism, stock prices will remain depressed and the economy soft.
"Before the market is going to stage any kind of a major rally, we have to have some of the questions about terrorism cleared up," said Paul Kasriel, economist at Northern Trust Co. in Chicago.
"How safe are we are at home here? Are we going to win the campaign against Afghanistan? We need a success," Kasriel said.
Consumer retrenchment goes hand in hand with worries of more terrorist attacks. Aware of the fragile state of consumer confidence, Bush, members of his Cabinet and congressional leaders have joined in a campaign to encourage Americans to return to a more normal economic life and start spending.
Bush did so in his radio message Saturday. On Sunday morning television talk shows, there was a chorus of cheerleading: "Go buy that car and have a good dinner," said Senate Democratic Leader Tom Daschle (D-S.D.). "Go out and buy new clothing for school."
That would help the country more than anything, he said.
Secretary of State Colin Powell also appealed to the country to return to a semblance of economic normalcy and not wallow in pessimism.
"Let's remember what we are made of," he said. "We are made of strong stuff."
But economists said they worry that the layoffs announced in the airline industry last week could spread to other industries, including hospitality and retailing, and this could turn into a major depressant.
Jobless don't spend
When people are out of work, they aren't responsive to patriotic appeals to spend their money, said Sung Won Sohn, a Wells Fargo Bank economist.
Sohn said fear over possible terrorist attacks and uncertainty over the president's campaign against terrorism are behind the deeper downturn.
Buying a new car is a "fun event," he said, "and when you feel pain in your heart, you don't feel like celebrating by buying a new car. . . . People are postponing their purchases."
Kathleen Stephansen, director of global economics at Credit Suisse First Boston, said consumers are under siege, with joblessness rising and stock market holdings declining.
"Income growth will slow," she predicts, and a recession will grip the economy until the middle of next year.
New economic stimulus from Washington will be important in cushioning the decline, but most analysts said it would not be enough to counteract powerful economic forces moving in the other direction.
A package of tax cuts and more spending could be approved in coming weeks, though congressional leaders have agreed to put off a decision on the measure for at least two weeks at the urging of Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Paul O'Neill.
Greenspan first wants to observe the effect of his lower interest rates and a $40 billion anti-terrorism bill approved by Congress days after the attack. Congress also approved a $15 billion bailout for the airline industry on Friday.
Other industries are beginning to call for help as well, but House Speaker Dennis Hastert (R-Ill.) said he hopes the airline measure will get goods and people moving again so that other bailouts won't be necessary. If Congress considers a new stimulus plan, it could include cuts in corporate and individual taxes and help for workers in industries hurt by the attacks.
The Federal Reserve is poised to reduce interest rates again Oct. 2, especially if economic news has not improved.
The central bank is in the middle of one of its most aggressive easing campaigns in its history. It has reduced interest rates eight times this year.
The economy is awash with funds, which sooner or later is expected to spark a recovery. But before the Pentagon and World Trade Center attacks, the Fed's interest rate reductions had failed to spur a rebound.
Consumers were spending before the attacks, but business spending, caused by too much investment during the boom, had collapsed. The challenge for the U.S. economy is to get the business community and consumers spending again, according to economists.
Corporate interests are pressing for a reduction in the corporate income tax, new tax incentives to spur investment and a cut in the capital gains tax. Some Democrats would like to see a rise in the minimum wage and a cut in the Social Security payroll tax.
If the stock market doesn't recover, the plunge in the wealth of Americans will cause them to retrench, analysts said.
"Unless we get a very sharp and sustained rally in the stock market, people over time are going to adjust to this lower net worth," Kasriel said. "They are going to be adjusting the old-fashioned way: They are going to save more."
While more saving is seen as healthy for the economy in the longer term, the overall economy would suffer, and people collectively would be worse off, analysts said.
One potential saving grace is that lower interest rates will generate a new mortgage refinancing boom, giving Americans more monthly income as their mortgage payments shrink. The question is: What will they do with this money? Stephansen believes they will use it to pay down debt rather than go on a consumption binge.
"It is an important dynamic," she said. By paying down their debts, consumers will have improved personal balance sheets going into 2002, she argued. That will set the stage for a sharp turnaround in the economy by midyear, she said.
Mortgage refinancing a key
Wells Fargo's Sohn, however, sees home refinancings as a major underpinning to the economy that will keep the recession from deepening.
"For 95 percent of Americans, housing represents the great bulk of their net worth, not stock," he said.
As for housing purchases, he added that homes for low- and moderate-income workers will continue to sell, but he said bankers have told him sales of luxurious homes have begun to soften.
As for the immediate future of stock prices, Sohn said the 14 percent decline last week is a sign the market has gone into a stage of capitulation and is moving downward toward a stabilizing level. Where that is, he would not speculate.
Unlike in past recessions, stock prices may no longer be watched as the barometer of the economic future, he said.
"Investors have been so battered, and there are so many uncertainties, that they have become extremely risk averse."