President Bush tried Tuesday to calm consumers troubled by an increasingly shaky economy. But even as he spoke, financial markets rose and then tumbled, and the Fed chairman warned that “significant challenges” lie ahead.
The market turmoil — the Dow Jones Industrial Average ended the day at 10,962, the first time it had closed below 11,000 in two years — clouded Bush's effort to use his first news conference since April to provide reassurance.
“The bottom line is this: We're going through a tough time,” he said. “But our economy's continued growing, consumers are spending, businesses are investing, exports continue increasing, and American productivity remains strong.”
Fed Chairman Ben Bernanke looked at the same data and trends and saw a gloomier picture, describing in testimony before the Senate Banking, Housing and Urban Affairs Committee how Fed officials found that “considerable uncertainty surrounded their outlook for economic growth.”
Digital Access for only $0.99
For the most comprehensive local coverage, subscribe today.
He said they “viewed the risks to their forecasts as skewed to the downside.”
With no decline in gross domestic product, economists aren't ready to declare a recession, but Mark Vitner, senior economist at Wachovia, wouldn't rule it out.
“If oil prices don't go below $130 by the end of the summer, it'll be hard for the economy to avoid a recession in the fourth quarter,” he said.
Bernanke seemed most concerned about inflation, suggesting that rising energy prices soon would be felt throughout the economy.
But Brian Bethune, chief U.S. financial economist at Global Insight, said the economic upheaval should trump all other financial concerns for policymakers, even inflation.
“There's no question that this is the cusp of a major financial crisis and the Fed needs to get ahead of the curve,” Bethune said.
The stock market's performance has added to investors' concerns about rising gasoline and food prices, mounting home foreclosures and upcoming earnings reports from financial institutions. Vitner said nervous investors might be suffering from information overload.
“There's just so much going on in so many parts of the economy that investors have been torn between whether things are finding a bottom or whether we've got more pain ahead of us,” Vitner said.
Wall Street's mercurial day ended with the Dow falling nearly 93 points. Shares of troubled mortgage giants Fannie Mae and Freddie Mac continued their slides. Fannie Mae dropped $2.40 to finish at $7.31, while Freddie Mac slipped $1.69 to close at $5.42.
Vitner said he expected the Fed's next move to be an interest-rate cut, not a hike as some suggest.
In other downbeat news:
Wholesale prices were up 1.8 percent last month, the Labor Department reported. Producer price inflation has grown 9.2 percent in the last year, the fastest since 1981.
General Motors, battered by the decline in auto sales, suspended its dividend and announced plans to lay off salaried employees and borrow up to $3 billion.
Oil prices fell by $6.64 to about $138 a barrel, as investors became concerned that the slow economy will dampen demand. But the price was still well above year-ago levels.
Retail sales were up a scant 0.1 percent in June, the Commerce Department reported Tuesday. Gas prices accounted for all the increase, Vitner said. “You take out gasoline prices and sales were down,” he added.
Nevertheless, Bush boasted that tax-rebate checks were prodding spending.
Vitner countered that a good portion of the expected economic bounce from the checks has been siphoned away by higher gasoline and grocery prices. But he added that the extra cash was likely to keep the GDP in positive territory for the second quarter. “I'm not so sure about the third quarter, though,” he said.