Credit Downgrade Won't Hurt Consumers, the Downer is Still the Economy

For the first time in history, Standard & Poor’s, an American-based financial services company, downgraded the credit rating of the United States government from their long-held top-tier rank to AA+. The remaining two of the Big Three credit ratings companies, Moody’s Investor Services and Fitch Ratings, both opted to uphold the country’s AAA rating for the time being.

According to many economists, it’s not really the downgrade in and of itself that will affect the U. S. economy, but the behavior of frightened consumers, as a result of the downgrade, that will have the biggest impact.

Cheryl Cost , the managing director of AFW Wealth Advisors, said in an article on Boston.com that, by themselves, the S&P downgrades will not cause the economy to recede. But fear-gripped investors and consumers reacting based on emotions and not logic to the recent economic bad news may very well incite a downward spiral.

America seems to be teetering on the brink of a “double-dip” recession, a term used to describe when an economy slides into reverse after experiencing a fleeting recovery.

"The S&P downgrades should have been non-events," Costa said. "But what we saw in [Monday’s] stock drop is an overreaction. Fear and panic have a way of feeding on themselves, and that’s what’s going on here. If people start yanking their money out of the stock market, and hoarding money rather than spending because they are now gripped by fear, that could bring on a downturn."

In actuality, July’s 9.1% unemployment rate showed a slight improvement, according to U.S. Bureau of Labor Statistics.

"The downgrades are having an emotional impact, a visceral one, but it’s unlikely to have the kind of impact that calls for dramatic action on the part of the average consumer," Daniel J. Galli told Boston.com.
The principal at the Norwell-based financial planning firm, Daniel J. Galli & Associates, Galli also went on to say "the S&P downgrade will not change the fact that the US is still the safest place for a large institutional investor to put money."

In spite of the current free-fall in the stock market, the impact of the AAA to AA+ downgrade will, most likely, not be felt by consumers for at least several months. Credit card interest rates follow the prime rate and the Federal Reserve has given no indication that consumers should brace themselves for those for any change in that area in the near future.

"Long-term, the downgrade is going to mean inflation," said the president of Cabot Money Management of Salem Rob Lutts to Boston.com.

John Caroll

John Carroll, one of Credit-land.com’s staff writers, comes to us directly from Long Island’s Newsday. His extensive background in journalism includes writing on real estate for several of New York’s leading real estate publications, as well as covering the political scene for Scepter Weekly. Aside from his work writing about finance, John is also an accomplished musician and songwriter who has performed in numerous nightclubs throughout New York City.