Economy Keeps Taking Hits; White House Points to Brighter Future

Gas pumps sit idle Monday in San Rafael, Calif. As with other sectors of the economy, more oil is being pumped than there is demand, leading prices to fall across the board.
Gas pumps sit idle Monday in San Rafael, Calif. As with other sectors of the economy, more oil is being pumped than there is demand, leading prices to fall across the board. (By Justin Sullivan -- Getty Images)
By Neil Irwin and Annys Shin
Washington Post Staff Writers
Saturday, January 17, 2009

Employers slashed thousands of jobs yesterday, and new data showed the nation's manufacturers are curtailing production, while the Bush administration forecast that the economy would start growing strongly next year.

In the administration's final Economic Report of the President, White House economics advisers forecast that the unemployment rate will average 7.7 percent in 2009 and that gross domestic product will grow by a feeble 0.6 percent. They forecast a "vigorous" expansion in 2010 and 2011, including 5 percent annual growth in gross domestic product, and an unemployment rate that falls to 5 percent.

As has frequently been the case over the past eight years, the White House forecast was more optimistic than those of most private economists. For example, in a survey of bank economists by the American Bankers Association released yesterday, the consensus projection was that the unemployment rate will average 8.1 percent in 2009 and that the economy will shrink 0.6 percent.

The reason for economists' pessimism was clear yesterday as a host of large companies announced layoffs. Advanced Micro Devices said it would cut 1,100 jobs, which represents 9 percent of its workforce; WellPoint, the health insurer, said it would cut 1,500; Pfizer, the pharmaceutical company, was reported to be cutting about 2,400. And in the biggest loss of jobs, Circuit City said it would liquidate, costing more than 30,000 people their jobs.

In another sign of the economy's weakness, the nation's factories produced fewer cars, appliances and electronics last month, driving industrial production down 2 percent in December, twice as much as expected. For all of 2008, production was down 7.8 percent, according to a report yesterday from the Federal Reserve.

The slumping economy is leading manufacturers to reduce their output steeply, with some of the worst losses in the automobile sector. Production of cars and trucks was down 7 percent in December and 27.1 percent for the year.

But the pullback is much broader than just autos. Production of home appliances, furniture and carpeting is down 23 percent for the year, as the housing bust leads to less demand for such items. Clothing production is down 6.2 percent, and even food production is off 1.7 percent. Those figures reflect a broader pullback by American consumers -- and the companies that produce the items they wear or consume.

"In a way, what stands out is that there is so much trouble across the board," said William Cheney, chief economist at John Hancock Financial Services. "Obviously the travails of the auto industry are not news, but the fact that so many industries are shrinking is noteworthy."

That means that many machines are sitting idle. Manufacturers were operating at 70.2 percent of capacity in December, down from 71.9 percent in November and 79.2 percent in December 2007.

Machines aren't the only thing with excess capacity; there is more oil being pumped, more food being grown, and more laborers looking for work than there is demand, leading prices to fall across the board.

Consumer prices were down 0.7 percent in December, as measured by the consumer price index, the Labor Department said yesterday. The steepest declines were in energy prices, which were off 8.3 percent.

A drop in consumer prices over the past three months wiped out increases earlier in the year; for 2008, the consumer price index rose by 0.1 percent, the smallest increase since 1954.

In the short run, lower prices are good for consumers. But if they keep dropping at the steep rate they did at the end of 2008, it could create the risk of a dangerous, self-fulfilling deflationary cycle. When prices are falling, people may start to assume that they are better off waiting to buy things until they are cheaper, making the economy weaker still and driving prices down further. Japan found itself in such a trap in the 1990s, as did the United States in the 1930s.

"Inflation, seemingly so worrying just a few months ago, has vanished," Global Insight economist Nigel Gault said. "Deflation is now the threat."

However, the Federal Reserve and other policymakers are moving aggressively to keep that from happening, pumping money into the economy to try to arrest the risk of a deflationary cycle.

Together, the industrial production and inflation data offer a portrait of an economy in which economic weakness is begetting lower prices.

"It's all very consistent in terms of the economy being extremely weak and getting weaker," said Cheney. "This is an environment where businesses either can't or don't dare to raise their prices, and workers certainly have no bargaining power. There's no upward pressure on wages or prices."

In the White House economic report, the Bush administration acknowledged that the U.S. economy is in bad shape. It noted that the economy's shift away from housing and consumer spending proceeded in 2008, but "was neither smooth nor graceful."

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