The fear economy

By Chris Isidore, senior writer

NEW YORK ( -- FDR said we have nothing to fear but fear itself -- and even though we're a long way from the Great Depression, uncertainty about the economy is proving pretty scary, and a major drag on the recovery.

Federal Reserve chairman Ben Bernanke said last week that there is "unusual uncertainty" about the nation's economic outlook. And every piece of good news seems to be clouded by fear of the unknown.

For example, companies are turning in healthy profits, and are sitting on a record-breaking pile of cash -- nearly $1 trillion and growing.

But businesses are reluctant to add jobs or make big investments.

"Companies remain nervous about the economy, their costs, and their products -- not an environment that encourages spending and commitment," said Howard Silverblatt, a senior index analyst with S&P.

Debt problems in Europe and fear of a slowdown in China are just two reasons. And while U.S. inflation is tame, now more economists fear deflation, where falling prices leave businesses worried about whether they'll be able make profits, leading to a downward spiral in staffing and investment.

"Businesses look at the chaotic and uncertain world, I don't think it's all surprising they sit on cash," said Allen Sinai, chief global economist for Decision Economics.

Businesses also are rightly worried about consumers keeping their wallets closed. People are saving more and paying off debt, and while that sounds like a virtuous thing, it could also choke off economic growth. Retail sales, which had shown signs of life earlier in the year, have fallen in the past two months.

"Consumers are clearly worried about the lack job growth and even more about the lack of income growth," said Ken Goldstein, economist with the Conference Board, the business research group.

Stagnating incomes and high unemployment are also problems for state and local governments, which are forced to slash staff and services because of declining tax revenues. They have cut almost 100,000 jobs this year, with deeper cuts expected.

In addition, stimulus spending by the federal government passed early in 2009 is expected to mostly run out in the second half of this year.

"These are fundamental concerns," said Goldstein. "There's a reason why businesses and consumers are nervous about where we are, and where we are headed in the next three to nine months."

Where do we go from here?

Most leading economists still believe the recovery will be able to continue at a slow pace. But some have started to speculate about the risks of a so called double-dip recession. Even many who are forecasting continued growth put the chance of another downturn at between 10% and 25%.

This wider-than-normal spread in forecasts at this stage in the business cycle only makes it more difficult for businesses and consumers to start spending again. And beyond the uncertainty about the economy, there is significant doubt coming out of Washington about what policy will be.

Tax breaks passed in 2001 and 2003 are set to expire on Jan. 1. At issue are top income tax rates, and rates on capital gains and dividends. Some will likely be extended, but it's no sure thing how it will play out. The passage of health care and financial services reform has removed some policy uncertainty for businesses, but rule-making under those landmark pieces of legislation still lays ahead.

Joseph Carson, chief economist at AllianceBernstein, said the outlook for businesses is somewhat clearer than it was six months ago.

But he said it's still difficult for businesses to commit to hiring and spending with the uncertainty that remains. Not knowing what the Fed will do with monetary policy only adds to the difficulty, he said. He criticized Bernanke for his Congressional testimony this week, that disappointed investors and economists who were hoping for more direction.

"He and his team don't have a clear path for the present or the future," he said. "It only adds to the negativity and uncertainty." To top of page

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