How are the Americans reacting?

By GRAEME BEATON
Updated: 19:00 EST, 17 March 2001

About £3 trillion has been wiped off the value of US shares in the past year. It is surely safe to say that no other nation has blown so much cash in so short a time. So how do these shareholders feel? The answer is probably stingy enough to stop going to the shopping mall and to scrap their plans to buy that new car. In short, most Americans feel much poorer, or as market analysts like to say, they are suffering a 'reverse wealth effect'.

Economists have been warning that such a slump in shares could cripple the giant US economy and, in turn, the rest of the world. The threat of recession, the first America has seen in a decade, was said to be growing with every downwards step in share prices.

Economist Patty Silverstein of Research Partners in Colorado said: 'We saw the wealth effect when the market was booming. Now we're seeing the opposite phenomenon.' But, by most measures, including those of Federal Reserve chairman Alan Greenspan, the threat to America's shopping habits has not been as drastic as some economists had imagined - at least, not yet.

Greenspan recently pointed out that while many people claimed to be anxious about whether interest rates would be cut, they were in fact still out there spending. Sung Won Soh, chief economist at banking group Wells Fargo, agrees. 'I think the perception is a lot worse than reality,' he said.

His own informal survey around America found that people were not that worried. 'As far as they were concerned, the recession is happening to someone else,' he said. His observation is supported by the latest figures on consumer spending, which grew a hefty 0.7% in January, almost as fast as in all three months of the last quarter of last year.

But while the sales figures appear to show little sign of a downturn in the shopping mall, other surveys show that consumer confidence is near a five-year low. Many economists argue that the spate of job cuts in the US - more than 400,000 announced in the past three months - is sure to start scaring consumers soon.

Others point out that many of these cuts have happened in the manufacturing sector, whose significance has been fast declining with the emergence of the technology-based new economy. And the stock market's role in any downturn may be limited. Most of the £5 trillion individual Americans have invested in the market is in the form of pension funds.

A good part of that money is held by Baby Boomers a decade or two away from retirement. And, for better or worse, they have been conditioned not to panic when the market drops. After all, those who sold during the 1987 crash lived to regret it.

Jared Bernstein of the Economic Policy Institute said Wall Street might be less important than many people think. 'Most Americans depend on their earnings for their livelihood,' he said. 'The market doesn't drive the total economy as much as one might think.' Many Americans, including Greenspan, must be praying he is right.