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What aided Obama now can hurt him

Severity of the nation's woes requires him to act before taking office or face an even deeper crisis, experts say.

November 17, 2008|Peter G. Gosselin | Gosselin is a Times staff writer.

WASHINGTON — 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.

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