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Economy Shows New Weak Spots
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Laura Richards said sales are down 10 percent at her two California Tortilla restaurants in Bowie and Annapolis. She said customers are buying small burritos instead of large ones and single burritos instead of combo meals. She said she's trying to attract customers with promotions -- letting children eat free on Thursday evenings, for instance.
Worse still, with banks tightening credit, she's been forced to put off expansion plans. "Any plans of opening new restaurants are on the back burner until we see what's going on on Wall Street," she said. "Originally, I said that five locations was a goal. Now I'm trying to manage my downside. It will take two to three years to get back to where I was a year ago."
Richards's problems are being felt across the fast food industry. GE Capital has stopped offering financing quotes for new restaurant franchisees, while Bank of America has refused to increase lending to McDonald's franchisees, according to the brokerage William Blair and Co. "While clearly other sources exist for franchisees' funding options, the recent pullbacks of two main lenders in the area are disconcerting, to say the least," analyst Sharon Zackfia wrote.
Although some corporations are sitting on large sums of cash -- and those with top bond ratings are enjoying favorable access to credit markets -- others are paying much more for short-term loans, if they can get them at all.
GMAC Financial Services has reduced its mortgage business and cut the number of U.S. auto leases it writes because of the high cost of borrowing money. "The cost of funds is atrocious right now," said Toni Simonetti, GMAC's vice president for global communications.
Bart Dzivi, a northern California lawyer representing financial institutions, said the financial system's problems will soon wash up on Main Street in a major way. It might take some time, he said, because the change is coming in waves. The first wave forced record numbers of homes into foreclosure; the second took down major financial institutions. The third wave, Dzivi said, will affect the well-off as their housing values decline. "They're not going to buy that second Mercedes," he said. "They won't take that vacation to Hawaii."
Many analysts say that the bailout that failed yesterday would slow -- not reverse -- the deterioration in the economy. Things will not correct themselves until the housing market rebounds, they say.
"The economy is in bad shape, but it is not because of the problems in the banking system, it is because of the housing crash," said Dean Baker, co-director of the Center for Economic and Policy Research, who thinks housing prices will fall well into 2009. "The bailout would have freed up some money. But I never saw a sea change even if it passed. It wasn't like suddenly we'd be flush with credit."
Staff writers Annys Shin and Ellen Nakashima contributed to this report.
