What Part Does Psychology Play in a Recession?

I found this interesting, gives one pause to think. However, with all the comments below I still think a potential credit crisis in conjunction with housing is a major problem. Text in bold is my emphasis. From Market Watch:

As the U.S. economy was sliding into recession in December 1957, a Dallas bank executive suggested to Time magazine the key to how bad things might get: "Psychology is the joker in the economy's deck of cards."

Yet just as quickly, the nation suppressed its fear of being showered with nukes and showed the Soviets how resilient capitalism is. Our economy took off like a rocket, growing 9.5% for an entire year beginning July 1958 -- a performance unrivaled since.

FDR's admonition that "we've nothing to fear but fear itself" resonates still because we know our state of mind has a major bearing on our economic well-being. The reality now is we're dangerously close to talking ourselves into a recession, as evidenced by the unexpectedly sharp drop in consumer confidence reported Tuesday.

U.S. consumers have taken $3-a-gallon gas and a drop in our home equity in stride. Yet the media seems hell-bent on convincing us multinational banks' subprime mortgage losses and a weak dollar will torpedo the economy in a way the stock market's collapse, mass layoffs and 9/11 scarcely did in 2001.

"There is a herd mentality with prevailing outlooks on economic conditions because few of us want to be caught unprepared," says Mitchell Marks, an organizational psychology professor at San Francisco State University. "If people get bombarded with a grim message, that herd grows bigger and stronger."

Not convinced we risk succumbing to fear-mongering? Consider these five signs that we're getting needlessly skittish:

1. Grinch steals Christmas

When two major retailers announced plans to open stores at 4 a.m. the day after Thanksgiving, the media widely characterized it as the industry running scared about consumers' holiday-shopping appetite. It was nothing of the sort.

Retailers have been moving up holiday-kickoff openings for years for one reason -- competitive advantage. Whoever attracts early-bird shoppers with advertised loss-leaders stands the best chance of capturing offshoot gift spending as well. That's especially true as consumers increasingly shop online, where they can't touch and feel merchandise and aren't as inclined to whimsical purchases.

Lo and behold, Friday's total sales rang in a blistering 8.3% higher than a year ago. Yet naysayers immediately turned the surprisingly good news into bad, attributing the rise to financially squeezed bargain hunters seizing on deals and predicting sales will slow sharply in the weeks ahead.

Illustrating the media's recent propensity for gloomy spin was a story in The New York Times, whose reporter threw objectivity to the wind in discounting the "huge crowds" he encountered at stores Friday by adding "but the mood was one more of desperation than of celebration." Oh, brother, let's just slit our wrists now to escape these bleak times.

2. Twisting a Fed chairman's words

In testimony to Congress on Nov. 8, Federal Reserve Chairman Ben Bernanke predicted the economy would "slow noticeably" in the months ahead. Those two words were highlighted in broadcast reports and headlines as if he were warning of a coming economic Armageddon.
Forget that the word noticeably means perceptibly and not calamitously. In the last two quarters, the economy grew nearly 4% -- well above the 2.5% to 3% sweet spot former Fed Chairman Alan Greenspan aimed for in setting monetary policy. Economic growth could slow by a third and still be within that range.

Worse yet, Bernanke's remarks became fodder for political opportunists like U.S. Sen. Charles Schumer, D-N.Y., who opined during his testimony: "I think we're at a moment of economic crisis." A slumping economy would certainly benefit Democrats in next November's elections -- so there went Schumer, chairman of Congress's Joint Economic Committee, dutifully talking up the specter of recession.

3. Fretting two bits for coffee

Two weeks ago, Starbucks reported its third-quarter "customer transactions" fell by 1%. Many analysts trumpeted that as a sign we're all into a belt-tightening mode that could crimp consumer spending, which drives two-thirds of economic growth.

The far more likely cause: the retailing colossus's brazen price hikes this year amid rising competition from lower-cost Dunkin Donuts and McDonald's. Maybe the markups awoke its diehard patrons, finally, to the realization they're paying ridiculous sums for water run through coffee grinds that they can brew at home or work.

Rather than reading Starbucks' tiny traffic slip as an omen of declining incidental purchases, it might just be the first sign the giant coffee peddler will need to introduce a value menu like its fast-food counterparts have in their mature market.

4. Not just any port in a storm

A sudden anxiety seems to be developing over who our Democratic and Republican presidential nominees will be in 2008, driven by more than just the advent of primary season. Mounting economic uncertainty is the root cause.

Three months ago, many Americans couldn't care who next occupies the White House; they were just eager for the current resident to vacate.

Let's just hope we don't slip into recession in 2008, however slight, or we'll be hearing from all candidates how they're best equipped to save us from economic ruin. Such trash talk relayed daily across every major media outlet could become a self-fulfilling prophecy.

5. Wall Street's profound neurosis

U.S. investors have a serious mental-health problem these days, namely, a case of manic depression.

The Dow has whipsawed up and down by 100, 200 and 300 points in a day with such regularity that it's almost become more the norm than the exception. Indeed, a 132-point drop Monday blamed on "new credit fears" preceded a 215 point jump Tuesday linked to ailing Citigroup drawing a $7.5 billion capital fusion and a 331 gain Wednesday on a hint of another Fed rate cut.

The trouble is 200-point daily jumps in the Dow don't register on our collective psyche nearly as deeply as 200-point drops. So the Dow is down 7% from its record high in October; it's still up 9.5% in the last 12 months. Yet we focus on the former and ignore the latter.

Too often, we forget the stock market's performance is only one of 11 gauges in the Index of Leading Economic Indicators. If you let its present bipolar disorder depress your outlook, it's no mere theory -- you are the bigger fool.

Certainly, the weak housing market and its related ills are putting a serious damper on potential economic growth. The median U.S. home price will drop slightly this year -- the first nationwide decline since statistic-gathering started in 1950 -- and may again in 2008.

Our bigger problem today is the toll years of uninspired political leadership in both parties have taken on our spirit. The vast majority of us, Republicans and Democrats alike, believe the country's run off course. We see a glass neither half-empty nor half-full -- a mindset that's formed cataracts on our view of the future. (I seldom make political comments, but I do think this one is has legs.)

Consider this: The combination of the Nasdaq's 80% drop, a two-thirds rise in our unemployment rolls and the trauma inflicted by a puissant Arab extremist together produced just one of the shallowest recessions in U.S. history. You gotta believe it'll take more than a passing credit squeeze to cause the world's greatest economy to falter again.