January 23, 2008

Signs of Trouble

Global stock markets react to fears of a slowing U.S. economy

By Joe McGowan

Stock markets around the world were in turmoil this week. From Europe to Asia, investors reacted to signs of weakness in the U.S. economy by selling stocks. In Germany, stock prices plummeted 7.2% on Monday, the largest one-day decline since September 11, 2001. In Brazil they plunged 6.6%. In Japan, stock prices fell more than 9% by Tuesday. The New York Stock Exchange was closed for the Martin Luther King Jr. holiday, so investors did not react to the worldwide jitters until Tuesday morning when stock prices fell drastically after the market opened. They later rebounded a bit.

MARK WILSON—GETTY IMAGES Many point to bad loans in the housing market as a root cause of the slowing U.S. economy.

A stock is a share, or piece of a company, that is sold to the public. Shares of companies are bought and sold in a marketplace called the stock market. A stock's price depends on how many people want to buy it. If the demand for a stock is strong, then the price goes up. If nobody wants to buy it, the price drops. Investors make a profit by selling stocks when the price is high. When prices start heading down, as they have this week, it's usually a sign of a weakening economy.

Why the Panic?

More and more investors around the world are worried that the U.S. economy is falling into a recession. A recession is a period when an economy doesn't grow. During a recession people spend less on products and services. Companies cut back on expenses and fewer people have jobs.

Many things have contributed to the fear of a slowdown in the world's largest economy. Last summer, the important housing market experienced a major crisis when some homebuyers were unable to payback loans. In recent years, some banks had begun offering large loans to borrowers who could not make the payments. The banks and lending companies lost billions of dollars and the housing market began to slump. Sales of existing homes fell from 6.4 million in 2006 to 5.6 million in 2007. So did the number of new houses being built, which fell to 1.3 million in 2007 from 2.1 million in 2005.

With time, the housing crisis began to impact other parts of the economy. Bank losses made lenders reluctant to offer new loans to people and companies. This "credit crunch" made it harder for businesses and people to borrow money. At the same time, costs of other products, including oil and gas, began to rise, further tightening the amount of cash available to consumers and investors.

Less to Spend

With less cash and increasing costs, shoppers have cut back on buying items, like clothes, cars and appliances. "People are up to their eyeballs in debt," says Mike Schenk, an economist at the Credit Union National Association.

Many companies have also had to cut costs--and jobs. In December, the number of people who could not find employment had inched up to 5%. That means that 5 out of every 100 workers who were looking for a job couldn't find one.

Although the current slowdown in the U.S. has not been officially called a recession, the downturn has heated up worries that the U.S. economy is weakening. That fear--whether it is based in fact or fiction-can drag down the global outlook. If U.S. shoppers have less to spend, foreign companies selling their goods here won't need to produce as much. As a result, their business will slow as well. The effects of a U.S. recession would be felt around the world.

In Search of a Solution

Government leaders in the U.S. are looking for ways to jump-start the nation's economy. President George W. Bush and Congressional leaders are working together on a $145 tax-relief plan for businesses and middle- and low-income people. They hope the bill will become law by February 18. "I believe we can find common ground to get something done that's big enough and effective enough," said Bush.

On Tuesday, the U.S. Federal Reserve, the institution that oversees banks, lowered a key interest rate. It was the biggest one-day reduction on record. A lower interest rate can encourage banks to lend and companies and people to borrow. Investors responded positively. Although stock markets around the world remained unpredictable, they had begun to calm by Wednesday. Bruce Rockowitz, a Hong Kong businessman who works with companies like Wal-Mart, said the lower interest rates, have given people "comfort that the government will do whatever it can to solve this crisis."

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