Wall Street crisis is speeding down mainstreet, analysts say
By Michael Oneal
CHICAGO — A grim cascade of data this week shows how rapidly the financial crisis that started on Wall Street has embroiled the rest of the economy, creating a downturn that will be longer and deeper than once expected.
American employers are jettisoning workers, consumer spending has tanked and General Motors, one of the nation’s pre-eminent manufacturers, said Friday it is in danger of running out of cash.
Economists marveled at the breadth and speed of the downturn, noting that the panic that shook the financial markets in September turned a run-of-the-mill slowdown into what promises to be a severe recession likely to drive the unemployment rate toward 8 percent by 2010.
They also said it raises the pressure on President-elect Barack Obama and the Bush administration to work together well before January’s transfer of power to create yet another stimulus package to spur economic activity.
"The financial crisis went from tough to acute; now the crisis in the real economy has gone from tough to acute," said Barclays Capital economist Ethan Harris. "This is the kind of data you get in a serious recession."
The week’s numbers were indeed sobering. Surveys of purchasing managers in both the manufacturing and the service sectors indicated a sharp slowdown across a broad swath of industries. Sales at department and big-box stores plummeted. Auto sales were the worst the industry had seen since World War II. And the economy shed 240,000 workers in October, bringing the year-to-date total to 1.2 million jobs lost.
"The economic lights went out in September and haven’t been turned on yet," said Mark Zandi, chief economist at Moody’s Economy.com.
In one of the most jarring examples of how a panic that started on Wall Street has created pain in the rest of the economy, General Motors Corp. on Friday reported a $2.5 billion third-quarter loss and acknowledged that its cash and liquidity position has fallen 23 percent to $16.2 billion from $21 billion on June 30.
David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., noted that GM has worked hard recently to shed manufacturing capacity and keep inventories low. But faced with stunning declines in vehicle sales, including a 45 percent drop in October alone, the auto giant’s cash burn in the quarter accelerated to $6.9 billion, prompting it to join Ford and Chrysler in an industry plea Thursday for an additional $25 billion in government loans.
In a conference call, GM Chairman Rick Wagoner said the company will "take every action we possibly can" to avoid bankruptcy. But without government help or a big increase in sales, GM’s cash supply could dip below the $11 billion to $14 billion the company needs to operate by the early part of next year.
While GM has struggled for years, the cash crunch is a direct result of the financial panic. Economists said the market for short-term financing has been helped substantially by a government program to buy commercial paper. But banks are still reluctant to lend to any but the healthiest customers, and auto loans are difficult to get. Consumers, even wealthy ones, battered by losses in home values and retirement accounts have retrenched to such a degree that many are putting off purchases of such big-ticket items as cars and appliances.
For companies like GM this presents a double whammy. Slower demand reduces production, making factories more expensive to operate. Workers get laid off, contributing to slower demand. Meanwhile, the company itself can’t find banks or investors willing to lend it money. GM has pledged to raise as much as $20 billion, largely through cost cutting asset sales and the capital markets. But a plan to raise as much as $3 billion from investors has stalled.
Barclays’ Harris said the thaw in the short-term debt markets is a promising sign that the government’s radical steps to rescue the economy are working. But unfreezing longer-term loans to spur car sales, home buying or capital spending will take time.
"It’s hard to get a bank to lend money if nobody has a job or companies don’t make money," said economist John Silvia of Wachovia Corp.
That’s why many economists say a new stimulus package like the one being devised by House Speaker Nancy Pelosi is probably an essential bridge.
Zandi reckons the government would have to spend another $300 billion just to keep the economy from contracting in 2009. But he said it will be important to spend about half of that before the inauguration, especially to shore up ailing state and local governments to keep them spending.