$700 billion doesn’t go far in bad times

Times Staff Writer

While Americans have spent the last month transfixed by the spectacle of one financial giant after another crashing to the ground, the rest of the U.S. economy has been sinking in the muck.

By now, the process is so far advanced that, even after passage of the Bush administration’s $700-billion financial rescue plan Friday, the nation’s economic options span the unappealing gamut from bad to worse.

“The wheels seem to be coming off the economy right now,” said Brian P. Sack, vice president of the respected forecasting firm of Macroeconomic Advisers. “It’s hard to see how we avoid a recession, and it could prove a tough one to climb out of.”

Even if the financial bailout plan begins to work, the nation will be lucky if all it experiences is a bad slowdown. The alternative, economists say, is something much worse -- a contraction that might go on for years.


The latest sign of trouble came Friday when the government reported that American employers sliced September payrolls by 159,000 jobs, the ninth straight month of losses and one that puts the country on track to shed a million jobs this year.

But jobs are only part of the trouble; almost every major player in the economy -- which had been growing until recently, if only slowly -- is now beating a hasty retreat:

* Consumers, who account for more than two-thirds of the nation’s total economic activity and who boosted their spending earlier in the year thanks in part to more than $100 billion in government stimulus checks, have reversed course and begun cutting expenditures. Real consumption, after adjustment for inflation, slipped two-tenths of a point in June, a half-point in July and flat-lined in August, the latest month for which numbers are available, according to the government’s Bureau of Economic Analysis.

* Manufacturers, many of whom had managed to profit because the weak U.S. dollar helped boost exports, have seen their business begin to dry up in recent months. New factory orders unexpectedly dropped 4% in August, the Commerce Department said Friday, the biggest decline in two years. Capital goods orders, a key indicator of companies’ future investment plans, slipped 2.4%, the biggest drop in more than a year and a half.

* Governments, especially state governments, have begun making steep cuts. In all, 29 of the 50 states had already cut spending, raised taxes or tapped emergency funds to balance their budgets for the fiscal year that began July 1, said Nicholas Johnson, an analyst with the Center on Budget and Policy Priorities in Washington. But 15 of those states, including Arizona and New York, are back in the red; stalling economic growth has caused their already shrunken tax revenues to contract further.

The combination of consumers hunkering down, manufacturers losing orders and states making cuts has economists slashing their growth forecasts for the coming months and years.

In the case of Macroeconomic Advisers, Sack said that his company thought only one month ago that the economy would manage to keep growing during the July-through-September quarter and would contract only slightly during the October-through December quarter before starting to grow again. He said that thinking has been revised, with hope for zero growth in the just-finished quarter and a several percentage point shrinkage between now and the end of the year.

Other forecasters take an even darker view.


“We’ve got a really rough time ahead of us in 2009 and 2010,” warned Roger Kubarych, chief U.S. economist with Unicredit Global Research in New York.

Many of the economy’s current troubles are directly traceable to the nation’s 14-month-old financial crisis.

In the last month alone, the crisis has in one way or another toppled the country’s largest insurer, its two largest mortgage finance companies, two of its largest banks and four of its biggest investment banks.

It led President Bush and Treasury Secretary Henry M. Paulson, both of whom came to Washington as free-market advocates, to embrace what arguably will be the biggest government intervention in financial markets since the New Deal.


It finally forced a deeply reluctant Congress to go along with the administration scheme to have Washington buy up $700 billion worth of troubled mortgage-backed assets in an effort to unclog the financial system.

Perhaps most importantly, it has made it all but impossible for companies that sell anything that costs more than what people carry around in their pockets to do business.

Mike Jackson is the chief executive of AutoNation Inc., the country’s largest auto retailer, with major operations in California, Arizona and Nevada, and a firm that relies on customers being able to land auto loans to finance their purchases. Here’s what he sees ahead:

“The economy was weak and has been weak for some time. But in September, we went from a credit squeeze to a credit crisis to a credit panic.


“The banks are using every excuse in the book with even our best customers to say no,” he said. “That’s going to be the banking industry’s new marketing slogan: Just say no,” he said.

AutoNation executives said that although 90% of their customers usually get car loans approved, only 60% were approved last month. Company sales, which typically run 550,000 vehicles a year, have fallen by nearly one-third.

Tracy Dearman is head of HSM Realty, a 10-person San Francisco real estate sales and management company founded by her grandmother to serve the city’s African American community.

“The rub for us is that even very qualified potential buyers won’t pull the trigger [and make a home purchase] because they are afraid,” she said. “The news is so scary I’ve gotten calls from clients saying, ‘Tracy, should we pull our money out of the bank?’ ”


Dearman said that company sales have dropped by 25% and that she has had to lay off one employee. She said the firm is getting by managing property for existing owners.

The dilemma that Jackson, Dearman and hundreds of millions of other Americans face is that even though many of the economy’s current problems are rooted in the financial crisis, those problems will only be eased -- but by no means erased -- if the crisis ends.

In part, that’s because the financial crisis has gone on for so long that it has sunk into the lives of Americans far, far beyond Wall Street, convincing them that this time is different than previous periods of upheaval and that they must change their behavior.

The extent to which people have been convinced is apparent in the unexpectedly steep fall in the miles that Americans drive their cars in the wake of recent gas price hikes, as well as in a 13% plunge in Las Vegas’ July gambling revenues.


“It’s the seventh straight month of decline,” said Nevada Gaming Control Board spokesman Frank Streshley. “We’ve never seen that before.”

Once people have changed their behavior, they seldom go back to their old ways quickly. “They are not going to be changed all at once or by one program,” such as Washington’s new financial rescue package, Kubarych, the Unicredit economist, said.

In addition to changes in people’s behavior, analysts said, the economy will continue to have trouble because its problems already have set off a sharp contraction in two industries -- finance and retail -- and those are likely to continue for several years.

The financial industry is likely to shrink by as much as 30% over the next several years, predicted Harvard economist Kenneth S. Rogoff, the former chief economist of the International Monetary Fund.


Rogoff said that the industry grew all out of proportion with its contribution to the economy in the last decade.

“We were told that we had this hyper-efficient, gold-plated financial sector,” Rogoff said.

“If it was so efficient it should have been working like Wal-Mart, giving great service at very low cost.” In fact, it was doing the opposite.

The result, Rogoff predicted, is that “the game’s up for a lot of these companies.”


As for retail, it had grown into one of the major employers in the economy as Americans saw their incomes and wealth rise and wanted to buy more stuff.

But with the incomes of the majority of Americans flat-lining and wealth declining as home values and investments plummet, the retail industry is likely to shrink as well.

“We expect 8,000 stores to close this year, which is probably a record,” said Howard Davidowitz, head of Davidowitz & Associates Inc., a New York retail consulting firm.

“This will be the worst Christmas shopping season in a century,” he predicted.



Times staff writer Tiffany Hsu in Los Angeles contributed to this report.