Plunging stock prices in the wake of Standard & Poor’s decision to strip the United States’ top-tier AAA credit rating may threaten consumer confidence and could push the frail economy into recession.
While analysts say the direct impact on the economy from the credit rating downgrade itself is limited, a sustained drop in share prices would have a negative impact on wealth — and likely force both consumers and businesses to hunker down.
Consumer spending accounts for about 70 percent of U.S. economic activity and analysts at Albion Financial Group estimate the domestic stock market has dropped by about 14 percent since July 25, wiping off $1.93 trillion.
“This massive move in the equity market does dim the economic outlook for the next six months,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank in New York. “We would put the recession odds at about 40 percent, and about two weeks ago they were at about a 10 percent chance.”
U.S. and global shares have come under relentless selling pressure since late July as investors took a dim view of a nasty fight in Washington over raising the country’s debt ceiling and a string of weak economic data around the world.
Adding to the stock market’s woes, S&P on Friday cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government’s budget deficit and rising debt burden. Stocks on Wall Street tumbled more than 5.0 percent on Monday, their worst day since December 2008 during the worst of the banking crisis.
Obama: We’re still an AAA country
President Barack Obama yesterday blamed a downgrade in the United States’ credit rating on political gridlock in Washington and said he would offer some recommendations on how to reduce federal deficits.
Obama stopped short of sharp criticism of Standard & Poor’s for its downgrade of U.S. debt to AA-plus from AAA on Friday. Senior administration officials have accused S&P of going ahead with the downgrade despite a $2 trillion mathematical error.
“Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country,” Obama said.
Obama said in a White House appearance that he hopes S&P’s downgrade of U.S. debt will give U.S. lawmakers a new sense of urgency to tackle long-term deficit spending and said he did not believe the reductions could be carried out with spending cuts alone.