Two Madison economists say the huge drop in the Dow Jones Industrials — a 635-point slide on Monday, the biggest since December 2008 — is not a sign of another recession on the way. But they do say it may take a while for the market to regain the ground it has lost.
"We've gone down 20 percent in 12 days, which is indicative of what I think is compounding of concerns," said David J. Ward, president of NorthStar Economics, Madison.
With the downgrade of the nation's bond rating, on top of economic concerns in Europe, stocks could fall another 5 to 10 percent, Ward said.
"Right now, the problem is here and until you get it to the tipping point, anybody looking for a rational market — not for a while. Nothing rational is going on now," he said, predicting it could take a year before stocks bounce back up to their previous levels.
Ward said, though, typical recession signs are not there, such as a jump in unemployment claims or in the price of commodities other than oil.
Menzie Chinn, UW-Madison professor of public affairs and economics, said the bond rating downgrade signifies "the inability of the political groups to agree to a credible plan to shrink the budget deficit in the longer term — and I want to stress, the longer term."
Chinn said economists are now expecting slower growth in the U.S. and in Europe. He said what's needed are moves to stimulate the economy. For example, Chinn suggested keeping a reduction in payroll taxes or adding tax credits to encourage companies to hire new workers. More federal aid to states, an extension of unemployment insurance and plans to spend more money on infrastructure would also help, he said.
A senior economist for the U.S. Council of Economic Advisors in the Clinton and Bush administrations, Chinn said for the long run, a critical step is to end the Bush tax cuts enacted in 2001 and 2003, which he blamed for much of the deficit.
"If we hadn't had them, we'd be raking in hundreds of billions of additional tax revenue every year," Chinn said, citing a January 2010 Congressional Budget Office report.