Fear of U.S. recession could help drive one

By Joanne Morrison - Analysis

WASHINGTON (Reuters) - Fear among U.S. consumers and businesses that the world's richest economy could go into a recession, or may already be in one, could help push the economy over the edge and bring on an even deeper, longer downturn.

In the final three months of 2007, the economy screeched to a near standstill, dragged down by what many economists say is the worst housing slump since the Great Depression.

As a result, talk of recession has been on the rise among Main Street people as well as economists, the media and a number of high-profile analysts, including former Federal Reserve Chairman Alan Greenspan.

With the housing market showing no sign of reaching bottom and mortgage-related losses mounting at Wall Street firms, many experts wonder if all the talk may add to the tendency of people to dampen their economic activity and spend less.

In economic circles, the concept of self-fulfilling prophecies is not new. It is a facet of what classical economist John Maynard Keynes called the "animal spirits" that dictate consumer behavior and drives economies.

Already there are signs of consumers getting gloomy. The Conference Board said consumer confidence slumped to its lowest level in five years. A Reuters/Zogby poll released last week that found most Americans now expect a recession in the next year.

Consumer caution comes at a tough time for an economy already lumbering under the weight of a housing downturn and a critical time for the government's plan to boost spending.

Many Americans will soon have extra money in their pockets from tax rebate checks that are a part of an economic stimulus package President George W. Bush recently signed into law.

The $168 billion plan aims to stimulate the consumer spending that accounts for two-thirds of the U.S. economy's output.

But consumer anxiety could undercut the hoped-for effect. The Reuters-Zogby poll found nearly half plan to use their tax rebates to pay down debt or pad savings.

"I suspect we are entering a period where consumers are much more sensitive that there is a need to save," said Michael Prebenda, global head of HSBC Direct, which released a study earlier this month showing that four out of five Americans plan to increase the amount they save this year.

"Tough economic times are changing the way Americans manage their finances," he said.

In one measure of how recession talk might be entering the mainstream, a news search of the word "recession" on Web search engine Google generates more than 97,000 news story links, versus the 300,000 for the economy as a whole. (For comparison, Britney Spears generates 22,000.)

"The power of the pen means that as people read the things that we write, they are forming an impression and their impressions can become a self-fulfilling prophecy," said Chicago-based economic consultant Carl Tannenbaum.

"While a self-fulfilling prophecy isn't going to be a cause for the recession, I think it can make it worse and I think it very likely will," said Stephanie Madon, an associate professor of psychology at Iowa State University who has studied self-fulfilling prophecy behavior.