Economy Shows New Weak Spots

Congress approves a massive plan to shore up the U.S. financial system, despite a stunning early defeat. The Senate passed the legislation on Wednesday evening, and the House passed the legislation on Friday afternoon.
By Michael A. Fletcher and V. Dion Haynes
Washington Post Staff Writers
Tuesday, September 30, 2008

The evidence is mounting: The economy is in a steep slide.

Unemployment is at levels not seen in five years. Consumer spending is flat. Many of the sectors that have been fueling the tepid economic growth of the past year are beginning to flag. Exports are softening. Agricultural and other commodity prices are slipping.

The question is, how long will the slide last, and how deep will it go?

Congress's rejection yesterday of a $700 billion bailout for the nation's teetering financial system made such questions even more urgent. Lawmakers have to find an answer.

"They now need to get moving or you really will have a serious drop in national income," said Thomas Ferguson, a professor at the University of Massachusetts at Boston. "We don't have to rescue Wall Street, but we do have to get credit markets open. You can't run private enterprise economies without credit. Nothing will work without that."

Some economists worry that the nation is in danger of slipping into a self-perpetuating cycle of tight credit, diminished confidence, reduced spending and growing unemployment that will result in a prolonged period of economic stagnation. Even relative optimists say the nation is in for nearly another year of sluggish economic activity, before the housing market hits bottom and things pick up again.

"The economy is struggling, to say the least," said Josh Feinman, chief economist for DB Advisors, Deutsche Bank's institutional asset-management division. "This credit crunch that we have has a vise-like grip. The arteries of credit flowing to the economy are severely constricted, and we need to free them."

The government released more bad economic news yesterday: Consumer spending was up less than 0.1 percent in August, the worst performance since February. That came on top of data last week showing that orders of durable goods are down and sales of new homes are plummeting.

Meanwhile, tightening credit has made it harder and more expensive for many small businesses to borrow money, a process that many analysts say could accelerate with the turmoil on Wall Street.

Dee Smith, who runs a small contracting firm that renovates and sells homes in Charlotte, Mich., said a bank he has dealt with for more than a decade has decided to finance a smaller share of his projects. While the bank would once give him construction loans for 80 percent of a property's appraised value, it now will pony up only 75 percent. That might seem like small change, but Smith said it has shaken up his entire business.

Because he cannot afford to put out the extra cash, he said, he has laid off four of his six workers. Meanwhile, because of the slowdown in the housing market, he's been unable to sell three houses he has renovated. For now, he's renting them out.

"I'm just hanging on until things change," he said. "But I don't see that happening for two or three years."

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