As the White House, Congress and the Federal Reserve struggle to stem the growing financial and economic crisis, the likelihood of success may ultimately come down to one factor: the American consumer.
What’s largely behind the mounting recession fears and wild gyrations of financial markets is the fact that what drives the U.S. economy is not new investment by corporations, not tax cuts or big new federal spending programs, but millions of ordinary Americans buying new cars, cruising the malls and upgrading to bigger TV sets.
Fully 70% of the American economy consists of consumer spending, which has held up remarkably well in the current record-breaking expansion that followed the Great Recession more than a decade ago. Even though wages and incomes have been stagnant for many households, they have continued to spend.
But the novel coronavirus strikes a blow at that long-running source of economic strength. It’s already begun to force people to cancel business trips and forgo personal travel, and to shelter in place instead of going to movies, restaurants and shopping malls.
Although it’s not clear how far-reaching or long-lasting the coronavirus pullback will prove to be, the very uncertainties caused by the continuing spread have sparked fears of impending recession.
The coronavirus panic could threaten a $10 trillion mountain of corporate debt, unleashing a cycle of layoffs and business spending cuts that would hit the economy just as some analysts are warning of a recession.
Financial markets already are showing major signs of stress. Investors are demanding higher interest payments in return for lending to less creditworthy companies; some businesses are delaying their planned bond sales while they wait for Wall Street to settle down; and ratings agencies are moving toward downgrading some corporate borrowers.
The mammoth debt bulge includes a dramatic increase in borrowing by the lowest quality investment grade firms — those rated just one level above “junk.” More than $1 trillion in “leveraged loans,” a type of risky bank lending to debt-laden companies, is a second potential flash point.
Watchdogs including the Federal Reserve have warned for years that excessive borrowing by corporations, including some with subpar credit ratings, might eventually blow a hole in the U.S. economy. Now, as Wall Street wrestles with a global epidemic, the debt alarms show how investors are reassessing risks they overlooked during the long economic expansion.