Obama reassures the nation on ailing economy
By SARA KUGLER and STEPHEN OHLEMACHER, THE ASSOCIATED PRESSArticle Photos
Fact Box
U.S.: Reports reveal battered economy
WASHINGTON - The government released a quartet of reports Wednesday that paint a bleak picture of the U.S. economy: Jobless claims remain at recessionary levels, Americans cut back on their spending by the largest amount since the 2001 terrorist attacks, orders to U.S. factories plummeted and new-home sales fell to the lowest level in nearly 18 years.
The Labor Department reported that initial requests for unemployment benefits fell to a seasonally adjusted 529,000 from the previous week's upwardly revised figure of 543,000. But claims remain at recessionary levels. The four-week average, which smooths out fluctuations, rose to 518,000, its highest level since January 1983.
One minor bright spot showed the number of people continuing to claim unemployment insurance dropped unexpectedly to 3.96 million, from the previous week's 4.02 million, which was the highest level in 25 years.
The labor market has grown by about half since 1983.
Meanwhile, the Commerce Department reported that consumer spending plunged by 1 percent in October, even worse than the 0.9 percent decline that had been expected. Consumer spending accounts for two-thirds of total economic activity.
Orders to U.S. factories for big-ticket manufactured goods also plunged last month by the largest amount in two years. Orders for durable goods dropped by 6.2 percent, more than double the decline economists expected. The Commerce Department report showed widespread declines throughout manufacturing led by decreases in autos and airplanes.
The department also reported that new-home sales decreased 5.3 percent last month to a seasonally adjusted annual sales pace of 433,000 homes, the lowest level since January 1991, another period when the country was undergoing a steep housing downturn.
The median price of a new home sold in October fell to $218,000, down 7 percent from a year ago, and the lowest since September 2004.
The Dow Jones industrial average rose about 50 points in early afternoon trading Wednesday.
With the economy showing further signs that it is headed into a steep swoon, the administration and the Federal Reserve rolled out two new programs Tuesday that would provide up to $800 billion in an effort to get more loans flowing in such critical areas as mortgage lending, credit cards, auto loans and small business loans.
Credit markets liked the new efforts, but private economists said the new moves were not likely to be the last changes in the government's vast rescue program, which has already undergone significant alterations since it was passed by Congress on Oct. 3.
Analysts believe more work will need to be done because of their expectations that the economy's vital signs will continue to worsen as the country slips into what many believe could be the worst recession since the early 1980s.
The unemployment rate has hit a 14-year high of 6.5 percent, putting pressure on personal incomes. The government reported Tuesday that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 0.5 percent in the July-September quarter, reflecting the fact that consumer spending fell at the fastest pace in 28 years.
Nariman Behravesh, an economist at IHS Global Insight, said he was expecting GDP to shrink at a 4 percent rate in the current quarter, reflecting the battering consumers are taking from the worst financial crisis since the 1930s. He predicted that the economy would remain in recession through the first half of next year.
"We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program," Behravesh.
To revive the economy, President-elect Barack Obama has said a top priority will be working with Congress to enact a stimulus package with the goal of creating 2.5 million new jobs over the next two years. Analysts believe such an effort will require spending between $500 billion to $700 billion, a figure that would be on top of all the money being spent to stabilize the financial system.
In the latest efforts to stabilize the financial system, the Federal Reserve announced Tuesday that it will buy $200 billion in securities backed by different types of debt including credit card loans, auto loans, student loans and loans to small businesses. That market essentially froze in October. These types of loans as a result have become harder to obtain and have carried higher interest rates
The Fed also announced that it will spend $500 billion to buy mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac and another $100 billion to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks.
This would greatly expand an initial modest effort announced in September with the goal of creating increased demand for mortgage-related assets. The hope is that this will drive down the price of mortgages and make home loans more available.
Analysts predict the Fed program could send mortgage rates down by as much as one-half to a full percentage point in coming months, helping to spur demand in the beleaguered housing market, which is suffering its worst downturn in decades.
The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion - though no one thinks the government will actually spend anything like that figure.
In the case of the Federal Reserve, the amount covers huge loans that financial institutions will have to pay back. In the case of the Treasury rescue effort, the government will at some point sell the stock it owns back to the banks, presumably when the banking system is doing better and the stock will be worth more.
CHICAGO - President-elect Barack Obama sought to reassure the nation and nervous holiday shoppers about the ailing economy Wednesday as beleaguered stores braced for their most important month of the year.
"Help is on the way," he proclaimed at his third news briefing on the economy this week. Fifty-five days away from taking office, he declared he would have an economic plan ready for action "starting day one."
Investors' improved spirits kept pace.
The Dow Jones industrials were up about 247 points at the end of the trading day.
To help with ideas from outside the White House, he announced he was forming a new team of advisers with former Federal Reserve Chairman Paul Volcker as the head.
"There is no doubt that during tough economic times family budgets are going to be pinched," Obama said. "I think it is important for the American people, though, to have confidence that we've gone through recessions before, we've gone through difficult times before, that my administration intends to get this economy back on track."
The crucial holiday shopping season gets under way in earnest on Friday, the day after Thanksgiving, with deep discounts already in place as stores try to lure buyers who are worried about their jobs and homes.
Volcker, 81, will head the President's Economic Recovery Advisory Board. The board's top staff official will be Austan Goolsbee, a University of Chicago economist, Obama said.
Volcker is no stranger to economic crises, having led the Fed under two presidents from 1979 to 1987. Volcker is a legendary central banker who raised interest rates and restricted the money supply to tame raging inflation in the 1980s. It was a painful prescription that helped send the economy into one of the nation's worst recessions.
However, he is largely credited with ushering in nearly three decades of relatively low inflation - an unthinkable feat in the 1970s, when the country was grappling with high unemployment, high interest rates and ever-rising prices.
"He pulls no punches," Obama said of Volcker. "He seems to be fairly opinionated."
Obama spoke as businesses were preparing for what many fear could be a disastrous month. And there was more bad news on the economy's current state.
The government reported Wednesday that jobless claims had remained at recessionary levels, consumers had cut back on their spending by the largest amount since the 2001 terrorist attacks, orders to U.S. factories had plunged anew and home sales had fallen to the lowest level in nearly 18 years.
Still, investors produced the Dow's fourth straight day of gains.
Fresh government bailout programs this week were given much of the credit. But Obama's encouraging words seemed to help as well.
"People should understand that help is on the way. And as they think about this Thanksgiving shopping weekend, and as they think about the Christmas season that is coming up, I hope that everybody understands that we are going to be able to get through these difficult times," Obama said. "We're just going to have to make some good choices."
As for his own choices for top officials, he defended his selection of former Clinton officials to help run his administration.
"The American people would be troubled if I selected a treasury secretary or a chairman of the National Economic Council at one of the most critical economic times in our history who had no experience in government whatsoever," Obama said.
"What we are going to do is combine experience with fresh thinking," he said. "But understand where the vision for change comes from. First and foremost, it comes from me. That's my job."
Obama said he will announce the remaining members of his new economic panel in the coming weeks. He already has named New York Federal Reserve President Tim Geithner as his treasury secretary and Congressional Budget Office Director Peter Orszag as his candidate to run the White House Office of Management and Budget.
Geithner was a Treasury Department official during the Clinton administration, and Lawrence Summers, who will head Obama's National Economic Council, was Clinton's treasury secretary. Other Clinton administration names include Eric Holder, who will be Obama's attorney general, and Rahm Emanuel, the president-elect's chief of staff.
"What I don't want to do is to somehow suggest that because you served in the last Democratic administration, that you're somehow barred from serving again," Obama said. "Because we need people who are going to be able to hit the ground running."
Obama said his new economic panel will include people from business, labor and academia, "who will bring to bear their wisdom and expertise on the formulation, implementation and evaluation of my administration's economic recovery plan."
His economic team largely complete, Obama is expected to introduce national security officials next week, including Hillary Rodham Clinton as his secretary of state. He is expected to announce he has asked Defense Secretary Robert Gates to remain at the Pentagon for a year. James Jones, a former Marine Corps commandant and NATO commander, is Obama's pick to be national security adviser.
