NEW YORK (CNN/Money) - Are CEOs whistling in the dark, or is the U.S. economy standing up to the weight of a tanking stock market better than some high-profile economists think?
So far the signals coming from the economy show slow, steady growth, which is what CEOs see. But worries are growing that the relentless bear market in stocks could stop the recovery in its tracks.
The Conference Board released its second-quarter survey of CEO sentiment Wednesday. Its Measure of business confidence edged down from a nine-year high in the first quarter of 66, but remained quite strong at 61 (any number above 50 reflects more positive than negative responses).
Still, the details of the report give some pause. Here's an interesting juxtaposition: The percentage of business executives who say business conditions are better than six months ago rose -- from 50 percent to nearly 62 percent -- but the number who expect an improving economy six months from now fell to 71 percent from 80 percent. As for profits, 70 percent expect increases in the next 12 months. But in manufacturing, 75 percent are optimistic, while in the service industry only 55 percent see rising profits in the next year.
And if stocks keep falling, can a positive view of the economy hold up? Forget the view. Can the economy hold up?
Consider this: A survey by the National Association for Business Economics showed that growth in demand slowed in the second quarter, while capital spending declined and fewer companies added workers. Twice as many companies expect to reduce employment than to add jobs over the next 12 months, and forecasts for future capital spending, while still positive, are heading downward.
For Morgan Stanley economist Stephen Roach, the worry is that we may be on the verge of a situation where financial market "contagion" pushes the economy into a double-dip recession. If investors continue to grow more wary of U.S. markets, they will demand higher rates of return to hold U.S. assets, and that would mean higher borrowing costs. This, he says, could crimp not only business capital spending but also homebuilding activity and consumer spending on big-ticket items such as cars. He says that alone could trigger the feared "double dip."
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RECENTLY BY KATHLEEN HAYS
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The corporate governance shock, he says, entails a further threat. "To the extent there is an accelerated cleansing of business accounting distortions, cost cutting can only intensify as U.S. businesses seek to repair the resulting earnings damage," he writes. "If the next wave of cost cutting entails headcount reductions -- precisely my fear -- then the resilience of the American consumer could finally crumble. And the double dip would then likely be on with a vengeance."
Roach, of course, is known to growl loudly and often, but other usually more sanguine Wall Street forecasters are turning more bearish. Goldman Sachs economist Bill Dudley in his latest report says he is becoming more pessimistic on the economic outlook because of the current steep decline in the stock market, which is "unprecedented" at this stage of a business cycle.
The problem is that we still are living through the bursting of the 1990's stock market bubble, Dudley notes, when all the forces that created the boom move in the opposite direction. Falling stocks hurt confidence and spending, weaken overseas demand for U.S. stocks, which further weakens the dollar, cuts tax revenues, etc and the "downward dynamic becomes self-reinforcing..."
This does not mean the U.S. economy must fall back into recession, but "it does suggest that subpar growth, low interest rates and financial returns are likely to be the watchword until the bubble dynamics play themselves out," Dudley concludes.
Once again the numbers from the Mortgage Bankers Association showed that applications for mortgages to purchase homes remained red-hot last week. And refinancings remained at a very healthy level. This is one big pillar of support for the economy. And June retail sales due for release Friday are expected to bounce back from May's sharp drop.
Optimists continue to point to housing and consumer spending as evidence the stock market is not causing the economy to shift into reverse. But as the summer and the bear market wear on, it will be interesting to see if the economy's performance lives up to that hopeful point of view.
Kathleen Hays co-anchors Money & Markets, airing Monday to Friday on CNNfn, and appears throughout the day reporting on the economy and how it affects financial markets. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Moneyline.
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