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What’s next? | A DOUBLE-DIP

Consumers, investors are mired in a crisis of confidence

Investors are leaving the turbulent stock market in droves. Investors are leaving the turbulent stock market in droves. (Stan Honda/ AFP/ Getty Images)
By Megan Woolhouse
Globe Staff / August 7, 2011

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With confidence in short supply after investors exited a volatile stock market in droves, fears are mounting that the US economy could fall back into a recession.

Economists cite disturbing trends: barely positive economic growth this year; rising unemployment in three of the past four months; a worsening sovereign debt crisis in Europe and mounting concerns about the United States’ own staggering debt.

In an analysis titled, “Markets Tumbling as Recession Alarm Bells Ring,’’ Nigel Gault, IHS Global Insight’s chief US economist, raised the chances of the nation slipping back into a recession to 40 percent.

“Those fears will not necessarily be realized - but there are plenty of reasons to worry,’’ Gault wrote last week. “Now that the debt-ceiling crisis is resolved, markets have refocused on the fundamentals and have found that they look very bad.’’

Many businesses and consumers are still feeling the sting of the last recession - the longest in post-World War II history - as well as the anemic recovery that has followed. The nation’s unemployment rate, which fell slightly to 9.1 percent for July, has remained above 9 percent since May 2009, with the exception of just two months - last February and March - when it dropped to 8.8 and 8.9 percent respectively.

The nation’s economic growth in the first half of 2011 has been less than 1 percent, and billions in federal spending cuts recently enacted by Congress could further hinder growth. Since the middle of 2010, the economy has grown only 1.6 percent; a recent Federal Reserve study found that when year-over-year economic growth falls below 2 percent, a recession follows within 12 months about 70 percent of the time.

Massachusetts, where the unemployment rate was 7.6 percent June, has been recovering from the recession faster than the nation, though it has regained just a fraction of the overall jobs it lost. The state lost more than 4 percent of its jobs in the recession that ended in 2009, and has gained back about one-third.

Peter Alcock, president of Beckwood Services Inc., a company that makes machinery and parts for the defense and clean energy industries, said he is increasingly fearful that any gains he made since the last recession ended in mid-2009 will disappear with another downturn.

On Friday, as stock markets gyrated, he said he thought the nation stood a 50 percent chance of recession. Thursday’s stock sell-off was a grim reminder of 2008, he said, when a slide in customer orders for machine parts caused business to plummet 30 percent, forcing him to lay off of about 20 people.

“It was very painful,’’ Alcock said. “In a small business, you know people personally, their stories, their kids, husbands, boyfriends.’’

Mark Zandi, chief economist at Moody’s Analytics, a forecasting firm in West Chester, Pa., said he has never seen such a “crisis of confidence’’ as he did in last week’s market freefall. Without confidence consumers pull back on spending, businesses don’t hire and expand, and the economy loses momentum.

“This market slide is a real problem,’’ he said. “Recession odds are clearly on the rise - I would not discount the possibility - but I don’t think we’re there yet.’’

Under the cloud of the debt-ceiling battle in Washington, Zandi said, it’s very difficult for US businesses and consumers to believe that progress is underway.

“I talk to a lot of business people all over,’’ he said. “They’re shell-shocked and glassy-eyed - they don’t even want to entertain the possibility that things could turn for the better.’’

Confidence, he added, is a fickle thing.

Megan Woolhouse can be reached at mwoolhouse@globe.com.