Carnage on Wall Street signals fears about U.S. economy
As U.S. stocks joined a global selloff to mark their biggest weekly decline since 2011, economists and investors cut their projections of what was already lackluster U.S. economic growth.
Markets around the world registered their distress after an August gauge of factory activity in China dropped to a more-than six-year low. The index came on the heels of worse-than expected July data on exports, industrial output and retail sales from that nation, the world's second-largest economy.
"China's weakness and response to its own weakness is rippling throughout the global feedback mechanism," Jim Russell, a principal and portfolio manager at Bahl and Gaynor, which manages and oversees $14 billion in assets, told CBS MoneyWatch.
The nosedive on Wall Street wasn't spurred only by mounting concerns over the People's Republic."Weakness... is not limited to China," analysts with Oxford Economics said in a note. "The Brazilian economy is in shambles, while the latest data from Russia showed the economy falling further into recession in the second quarter."
Stocks in China dropped, with the Shanghai Composite Index finishing down 4.3 percent. Equities in Indonesia and Taiwan waded into bear-market terrain and European equities sold off for a third day straight, with the Stoxx Europe 600 Index down nearly 13 percent from its record and in correction mode.
A day after Wall Street's biggest single-day decline in 18 months, the Dow industrials (DJI) plummeted 531 points, or 3.1 percent, to 16,460, leaving it down 10 percent from its May high. Down more than 7 percent from its May record, the S&P 500 (SPX) fell 65 points, or 3.2 percent, to 1,971. The Nasdaq Composite (COMP) shed 171 points, or 3.5 percent, to 4,706.
The S&P 500 issues lost $1.14 trillion in market value this week, or $1.07 trillion if adjusted for float, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
On the New York Mercantile Exchange, West Texas Intermediate oil for October delivery fell below $40 a barrel for the first time since 2009, before ending at $40.45, down 2.1 percent.
"Oil is a necessary commodity for global growth. If you're not seeing global growth, you're not seeing a lot of demand," Paul Nolte, a senior vice president and portfolio manager at Kingsview Asset Management, said of the eighth weekly price slide for the commodity. "We have a lot of supply at a time when we're seeing demand coming down, which spells disaster for the oil market."
About a year ago, China projected a 2015 growth rate of 7 percent for the world's second-largest economy. It now appears unlikely that China will meet that target. "They may officially, but it's clear the numbers don't add up," Russell said.
Since November, China has attempted to soften the blow as its economy slows, with Beijing cutting interest rates to boost lending and devalue its currency.
The steps had an "immediate and direct impact on many emerging markets," with Asian nations including Japan, Thailand and Malaysia all getting hurt, Russell said. Brazil and Chile, both large exporters of commodities, have also been adversely impacted. "Is this impacting the United States? It is beginning to is the real answer."
"Because the dollar so strong on a relative basis against many currencies, it does appear exporters get hurt in a currency war scenario that is perhaps unfolding," Russell said, noting that exports represent 13 percent of U.S. GDP, or gross domestic product. "That means machinery makers, energy companies and a lot of manufactured goods start to become uncompetitive against China."
Earlier this month, the Labor Department said U.S. productivity of nonfarm workers rose 1.3 percent at a seasonally adjusted annual rate in the second quarter, a scant improvement of 0.3 percent from a year earlier but beneath the country's 50-year average of 2 percent growth.
U.S. economic growth is likely to come in at the low end of a 2 percent to 2.5 percent range in the third quarter, Russell said. "Should markets disrupt consumer confidence, then you could see a print below 2 percent."
He declined to make a call for the fourth quarter, saying that the U.S. entered the latest quarter "with things on track, but the numbers as we move through the quarter have been generally weaker."
Analysts at Credit Suisse believe revisions out next week could push second-quarter GDP growth above 3 percent, and first half GDP to nearly 2 percent. "We expect second-half GDP to grow at about 3 percent."
"We're not calling for a recession here in the United States, we're seeing decent growth, but that's about it," Nolte offered.
The U.S. economy has three things going for it in Russell's view: the consumer, housing and autos, three areas he calls "especially strong," and all helped by low interest rates.
Market watchers sought to put the weekly market rout in perspective by emphasizing the U.S. economy's overall strength. But they conceded that the slowdown overseas may affect the Federal Reserve as policy makers ponder whether to raise interest rates next month.
Until recently, many forecasters expected that "lift off" to come in September, which would be the first rate hike since 2006. But analysts with Credit Suisse now put the likelihood of a rate hike next month at less than 50 percent.
Global events "perhaps delays the Fed increase into later in the year, or 2016," Russell said. "The markets are reacting to global uncertainty, but the economic reality in the U.S. is slow growth and relative stability."