By JEANNINE AVERSA, AP Economics Writer Jeannine Aversa, Ap Economics Writer 2
hrs 37 mins ago
WASHINGTON Beaten down and watching their wealth shrink, Americans are
burrowing ever deeper cutting back on spending and spelling more trouble for
the sinking economy.
One of the biggest problems saddling the country is damage from the housing
market's collapse. Mounting foreclosures, falling home prices and soured
mortgage investments are taking their toll on both individuals and businesses
alike.
Federal Reserve Chairman Ben Bernanke, who is scheduled to speak via satellite
Friday at a Berkeley, Calif., conference on the mortgage meltdown, is likely to
call on government officials and lawmakers to keep working on ways to provide
more relief.
The Bush administration is considering a plan that would help around 3 million
struggling homeowners avoid foreclosure by having the government guarantee
billions of dollars worth of distressed mortgages. The plan also could include
loan modifications that would lower interest rates for a five-year period.
Fallout from the housing meltdown has spurred the worst global credit and
financial crisis in more than a half century. To combat the problems, the
government has taken a flurry of bold steps. The Treasury Department is pouring
$250 billion into banks in return for partial ownership and the Fed this week
started buying mounds of debt from companies. It also slashed interest rates to
1 percent, a level seen only once before in the last half century.
A new batch of economic reports out Friday is likely to offer fresh
confirmation of the stresses weighing on American consumers. Income growth is
expected to barely budge in September, inching up just 0.1 percent, according
to economists' estimates. Consumers probably trimmed their spending during the
month by 0.3 percent, economists predict.
And, given the weak jobs market, employers aren't expected to be overly
generous with compensation to their employees. Workers' wages and benefit costs
are expected to rise 0.7 percent during the third quarter, economists are
forecasting. If that happens, it would mark the same size increase from the
previous quarter.
All in all, the economy as a whole contracted at a 0.3 percent pace in the
July-to-September quarter, reflecting a sharp pull-back by consumers. They
ratcheted back spending by the largest amount in nearly three decades, the
government reported Thursday. Consumers' disposable income took its biggest
drop on records dating back to 1947. Retailers are bracing for a grim holiday
buying season.
Economists say tougher times are still ahead. Believing consumers are cutting
back even more right now, they predict a much larger economic decline
anywhere from a 1 to 2 percent rate during the current October-December
period. That would meet a classic definition of a recession two straight
quarters of shrinking GDP.
The grim news comes just days before the nation picks the next president.
Either Democrat Barack Obama or Republican John McCain will inherit a deeply
troubled economy and a record-high budget deficit that could cramp spending
plans.
"I think it's very, very important not to hold out the prospect of silver
bullets that will correct these crises," Lawrence Summers, a Treasury secretary
in the Clinton administration, said in Boston on Thursday.
"One of the difficulties has been there's been a succession of silver bullets
that turned out to be hollow," he said. "So I think one just has to be really
careful and sober about recognizing there are very serious risks in the
situation ... and that the process of improvement will take time."