Recession worries rock the market

What happened

Anxieties over the U.S. economy mounted this week, after Federal Reserve Chairman Ben Bernanke told Congress that economic growth would “slow noticeably” in coming months and warned of heightened inflation risks. High oil prices and the slumping dollar, Bernanke said, “had the potential to boost inflation in the longer run.” But he avoided the word “recession,’’ predicting “slower growth.’’ Stock markets swung wildly following Bernanke’s testimony, with the Dow Jones industrial average dropping below the psychologically important 13,000 mark, before rallying this week. The rally was sparked by a drop in the price of oil, which previously had flirted with $100 a barrel, as well as by an encouraging sales report from Wal-Mart.

Overall, the signals were troubling. The dollar fell to record lows against several major currencies, including the euro, the British pound, and the Canadian dollar. Technology stocks, thought to be immune to U.S. economic woes, slumped following downbeat earnings forecasts from networking giant Cisco Systems. And several big banks indicated continuing uncertainty over the depth of their subprime-mortgage losses, with the Bank of America setting aside $600 million to safeguard its money-market funds. “Banks really don’t know what they have on their books,” said New York investment manager Alan Loewenstein.

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What the editorials said

Watching the economy these days is like watching an Indiana Jones movie, said the St. Louis Post-Dispatch. “Real estate bombs explode, pillars of banking totter, investors duck for cover.” Yet our economy has escaped “with only a few bumps and bruises.” The unemployment rate is still a low 4.7 percent, with 166,000 new jobs created in October. Gross domestic product grew at a healthy 3.9 percent clip from July through September. It looks as if the economy’s “remarkable performance” will continue.

“The Fed remains perched on its tightrope,” said The Washington Times. In ordinary times, the central bank would cut interest rates to jump-start the sagging economy. But with the dollar declining and the price of oil still through the roof, “inflationary pressures mount.” To keep those pressures in check, the Fed may have to stand pat, thereby endangering the “Bush boom.”

What the columnists said

Some boom, said Bob Herbert in The New York Times. Recession is more like it—though don’t expect such straight talk from Bernanke. Wages are stagnant; prices for food, gas, and other necessities are way up; and “millions of Americans are managing to make it from one month to another solely by the grace of their credit cards.” Whether or not any of this technically proves a “recession” matters little to ordinary Americans struggling to make ends meet.

Actually, the recent turmoil has many “silver linings,” said David Leonhardt, also in the Times. The drop in housing prices is welcome news to first-time home buyers. The dollar’s fall boosts the economy by ramping up exports, while higher prices for luxury imports encourage consumers to save. And more expensive gasoline could speed the move toward fuel-efficient cars. Yes, the economy has a bad case of the jitters. But “as long as the financial system doesn’t have a major meltdown,” none of the current trends “will turn out to be as bad as you think.”

One trend certainly could, said Eric Weiner in the Los Angeles Times: Americans’ addiction to borrowing. “Much of our recent economic surge was built on a fantasy of unsustainable borrowing.” Easy credit allowed Americans “to buy houses, cars, and other big-ticket items they couldn’t really afford.” Corporate America went on a $3.6 trillion shopping spree, “based on the idea that the historically low interest rates” would “continue in perpetuity.” Now the bill has come due, and “a recession is practically a foregone conclusion.” The only question is how long it will last. “We could be cleaning up this mess for a while.”

What next?

Republican Party strategists fear that GOP candidates “may ultimately have to answer for rising gas prices and a slumping housing market,” said Peter Nicholas in the Los Angeles Times. Pocketbook issues tend to favor Democrats, who are already working “darkening economic trends” into their campaign messages while promising to deliver the middle class relief from rising health-care and education costs. “Any economic pain comes out of the hide of the Republican