What aided Obama now can hurt him
The wave of bad economic news that helped carry Barack Obama to an election victory this month now threatens to swamp his presidency even before he takes the oath of office Jan. 20.
As the Democratic president-elect scrambles to assemble an economic team, the crisis that at first seemed confined to Wall Street and the nation’s financial markets has been raging through Main Street and the regular economy of labor, goods and services.
As a result, Obama would enter office and immediately face a maelstrom of painful decisions fraught with the potential for costly mistakes.
“Obama’s hand is being forced by the crisis,” said Ellen B. Zenter, senior U.S. economist at Bank of Tokyo-Mitsubishi in New York. “He’s not going to have the luxury to wait until inauguration before getting involved” in managing the economy’s troubles.
In the last two months, a year’s worth of housing price plunges, credit freeze-ups and financial firm collapses have caused consumer confidence to crumple, employment to tumble and retail sales to plummet.
The combination has helped to pull down the rest of the global economy, which until recently resisted the negative tug of U.S. troubles. And the extraordinary strength of the undertow at home is reflected in the fact that an abrupt collapse could occur in America’s last big bastion of manufacturing -- the auto industry.
“If they were facing recession-level sales, U.S. automakers would have been prepared to handle that,” said David E. Cole, chairman of the nonprofit Center for Automotive Research in Ann Arbor, Mich. “But the problem is this credit crisis; it’s sending sales off a cliff.”
Asked how long, under current conditions, industry giant General Motors Corp. could hold out against bankruptcy, Cole, a veteran observer of the business, said: “A few weeks.”
The economy’s problems are greater than any faced by an incoming president since at least Ronald Reagan in 1980. And there is a palpable fear in Washington that they could grow worse. The dramatic steps taken by Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke have helped, but they have not broken the back of the problem.
Last week, Paulson in effect acknowledged that what was supposed to have been the centerpiece of a $700-billion financial rescue package approved by Congress in early October -- a plan to buy up troubled mortgage-backed securities in order to unclog the financial system -- has proved unworkable.
Although Paulson suggested other uses for roughly half the remaining funds, he carefully avoided calling for the money to be made available to him, a move that senior Democrats on Capitol Hill said signals that he intends to leave decisions about the rescue’s future to the next president.
Historically, the country often has fallen into recessions, rather than slipping gently into them. But even by historical standards, the dimensions of the current economic falloff are striking.
Consumer confidence, which had held up remarkably well in a year of housing price declines and even rose moderately amid the collapse of investment house Lehman Bros. Holdings Inc. and insurer American International Group Inc. in September, plunged last month to its lowest level in more than four decades.
Employment, which had been sliding at a pace of less than 100,000 jobs a month through August, dropped by 284,000 in September and an additional 240,000 in October.
The government reported Friday that retail sales fell 2.8% last month, the fourth consecutive monthly decline in consumer purchases and the largest since Washington began keeping records in 1992.
The abruptness of the change also has become apparent through recently released corporate earnings reports as one chief executive after another has told of business drying up seemingly overnight.
Richard Fain, CEO of Royal Caribbean Cruises Ltd., the world’s second-largest cruise operator, told analysts that new bookings for trips dropped off in a matter of only a few weeks last month. Robert Iger, Walt Disney Co.’s CEO, said reservations at Disney theme parks had “fallen off considerably” in the last quarter. He told a television interviewer that the firm’s cable and broadcast TV ad revenues dropped faster than at any time in his more than 30-year career.
In the steel industry, Daniel R. DiMicco, chairman of Nucor Corp., America’s largest steel company, said that “what started out as a seasonal slowdown . . . has now been overwhelmed by a worldwide financial crisis that’s unique in both size and scope in our lifetimes.”
As corporate reports of trouble have accumulated, economists have repeatedly darkened their forecasts. Goldman Sachs says the U.S. is headed into the worst recession since the early 1980s with an unemployment rate of 8.5% or higher.
“We’re expecting possibly the worst recession since World War II,” said Zenter of the Bank of Tokyo-Mitsubishi.
In ordinary times, even serious economic troubles would not be enough to force a president-elect to act before assuming office.
They weren’t enough to force action from Bill Clinton in the early 1990s. Clinton made a show of making his key economic appointments early and of holding a high-profile economic summit nearly two months before his inauguration. But he didn’t start making policy.
In the early 1930s, despite the best efforts of outgoing president Herbert Hoover, Franklin D. Roosevelt refused to be drawn into the crisis of the Great Depression until he had taken office.
But many economists believe that Obama cannot wait until mid-January before taking steps to try to prevent at least the worst-case economic outcomes from occurring.
The reason is that as the financial crisis knocks over more pieces of the wider economy, the resulting problems are causing still more financial dominoes to fall. And as the economic problems escalate, more and more Americans run for cover.
“Virtually every player in the economy -- consumers, businesspeople, investors -- are battening down the hatches,” said Mark Zandi, chief economist of Moody’s Economy.com in West Chester, Pa. “Unless Washington takes immediate and overwhelming policy action, the new president is going to have a very hard time reversing that and getting people to go back to business as usual.”
The problem is most acute with the auto industry. Cole and other industry analysts say the immediate problem bedeviling GM, Ford Motor Co. and Chrysler has little to do with doubts about their vehicles or their business practices; it is almost entirely the result of an evaporation of auto loans needed to finance purchases.
“These companies are doing most of the things people have said they need to do,” Cole said. “They’ve negotiated contracts that kick in next year that will substantially reduce labor costs. They haven’t built more [vehicle manufacturing] capacity than the market has the ability to absorb. In fact, they’ve reduced capacity.
“The credit crisis is the problem,” he said.
But without immediate aid, one or more of the companies could be seeking bankruptcy protection in a matter of weeks.
Cole argues that such a development would result in those firms’ destruction, and his automotive research center estimates that it could cost as many as 3 million jobs. That would push the nation’s unemployment rate above 10%, a level not seen since the deep recession of the early 1980s.
Obama raised the issue of auto industry assistance at his meeting last week with President Bush, and aides to the president-elect are deeply involved in bargaining over funneling as much as $50 billion to the Big Three, according to people familiar with the talks.
These people said that besides wanting to see the economic threat of bankruptcy removed, the Obama team would like to avoid having to deal with the unpopular and politically charged issue of auto aid during his first weeks in office. But thus far, aid supporters have encountered a wall of opposition from the White House and Senate Republicans.
Analysts say that besides the auto issue, Obama faces a broader question: Can he afford to wait to try to restore Americans’ confidence in their economic prospects?
“There hasn’t been a time since the Great Depression that Americans’ confidence has been so scarred,” Zandi said.
“Collapsing confidence is self-reinforcing. We have to start trying to short-circuit it now. Two months from now may be too late.”
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