Energy Hikes, Stock Losses Threaten U.S. Growth
Stocks tanked and energy prices spiked Thursday, propelled by a burst of violence in the Middle East and new signs of sagging corporate profits at home. The combination renewed fears of global instability and cast a shadow across the U.S. economy.
An apparent terrorist bombing of a U.S. Navy ship in Yemen and Israel’s military retaliation for the killing of two soldiers by Palestinians drove crude oil prices sharply higher and sent natural gas prices to records. Analysts warned that if the conflict-driven price hikes continued, they could help end the nation’s 10 years of uninterrupted economic growth.
The dark uncertainties of Arab-Israeli conflict aside, investors exhibited substantial doubts about the domestic economy’s prospects. They punished hardware giant Home Depot Inc. for missing its profit estimates by 3 cents a share and drove stocks to their biggest declines in six months.
“If the situation in the Middle East continues and combines with a market stock decline and shaken consumer confidence, we’ve got a lethal combination,” said Stephen S. Roach, chief economist of Morgan Stanley Dean Witter & Co. in New York. “The energy shock is hitting when the forces of deceleration are already at work.”
The Dow Jones industrial average tumbled 379.21 points, or 3.6%, to close at 10,034.58, in large part because of Home Depot. The bellwether market measure is now off 12.7% for the year.
The technology-laden Nasdaq Composite Index declined for a sixth day running, losing 93.81 points, or 3%, to close at 3,074.68. The index has lost 24% of the value it started the year with, and has plunged 39% from its March 10 high.
Home Depot said its troubles didn’t result from a weakening economy. But the market’s strong reaction--driving the company’s stock down 29%--reflected growing concern that consumer spending is headed for a slowdown. Other retailers have reported slower sales in recent months.
Analysts said that, by themselves, sharp price drops such as Home Depot’s are not a bad thing. The Federal Reserve has said for more than a year that the economy was growing unsustainably fast and has raised key interest rates to slow it. One result, they say, should be declining stock prices or at least less feverishly rising ones.
But analysts warn that, with the Fed-engineered slowdown being fueled by energy price hikes and share price declines, the result could be even slower growth than the Fed intended. Some fear that the combination could cause growth to stall altogether. And the Fed could be powerless to do much about it.
“Permanently higher energy prices are deadly for stock markets,” said Allen Sinai, chief global economist with Decision Economics, a Boston consulting firm. And sharp stock market declines may be deadly for the consumer spending that has fueled much of the last decade’s growth, he added.
“The risk of an economic hard landing is going up,” Sinai said.
Crude oil prices climbed more than 8% on Thursday, their biggest jump in two years, after the explosion aboard the U.S. Navy ship in Yemen and Israeli military retaliation for the killing of two soldiers prompted fears of a new Middle East oil cutoff.
“This is the fourth energy shock in the last 27 years,” said Roach, the Morgan Stanley economist. “The first three led to recession. Investors are asking why this one should be any different.”
Analysts said that if the latest Middle East crisis passed and oil prices fell back to the $30-a-barrel range, where they settled recently after President Clinton ordered the release of supplies from the Strategic Petroleum Reserve, the economy should weather its energy problem.
But they warned that if the crisis drove prices up to the $50 range, there could be substantial repercussions. That’s especially so because increases of that size would likely cause the economically nettlesome combination of higher inflation and lower growth.
“There would be a stagflationary shock,” said Alan Blinder, a Princeton economist, former Fed vice chairman and advisor to Democratic presidential candidate Al Gore.
Such shocks put the central bank in a bind. If it lowers interest rates to offset the growth-slowing effects of the oil price hikes, it risks sparking renewed inflation. But if it raises rates to fight inflation, it risks aggravating the slowdown caused by higher oil prices.
Analysts said the economy may well have the strength to plow through the current crisis in the same way it did the Asian and Russian financial crises of the late 1990s. But they warned that there are several huge imponderables, most especially how American investors and consumers will react if the current troubles continue.
“The combination of a Middle East crisis with a stock market correction and an election is a real nightmare,” remarked Mark M. Zandi, chief economist of Economy.com, a West Chester, Pa. consulting firm. “Another couple days like this one and it’s really going to affect people’s thinking.”
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Energy Supply
Oil prices soared 8.5%, natural gas hit records as Mideast troubles threaten cutoff. C1
