Economists getting gloomier about outlook

“We’ve gone from a credit crisis or credit squeeze to a credit panic," he said Friday. "I’ve been across the country in our stores these past couple weeks, and it is not pretty. The banks are looking for every excuse in the world to say no. And they're saying no to good customers with good credit that would be very good business for them.”

Until recently, about 90 percent of customers with good credit were approved for a loan; that rate has fallen to about 60 percent, said Jackson. For customers with a poor credit record, the approval rate has fallen from 50 percent to about 10 percent, he said.

Those lost sales are going to bring more job losses at auto manufacturers, parts suppliers and  car dealerships. Even if credit begins flowing again relatively quickly, Jackson thinks the damage to the industry has already been done.

“There's going to be a significant fallout,” he said. “Where the industry used to lose a couple hundred dealerships a year, I think over the next couple of years, that is going to break into the thousands.”

Car dealers aren't the only ones struggling with the sharp cutback in consumer lending. Retailers slashed 40,000 jobs in September, nearly double the average pace in the prior two months. Mesirow Financial chief economist Diane Swonk expects that number to continue to rise into the critical holiday shopping season.

“Most retailers cannot get funding for their inventories right now for the holiday season,” she said. “They're planning on store closures and not hiring the usual seasonal hires that they put in. All of that will work against the employment situation and make things worse before they get better going into the holiday season.”

Going into September, the economy was being dragged down by some of the usual suspects: weakness in manufacturing, the slump in housing, and the spike in energy costs. But when trying to assess the impact of a full-blown lending panic, there are few historical reference points to turn to.

“All of a sudden, in the last two weeks, things have deteriorated,” said Brian Wesbury, chief economist at First Trust Advisors. “And I think this is due to this credit crunch, this kind of panic. Never in modern-day history have we had a panic-induced recession. If it's confidence, that can be a very quick thing down. And once things get stabilized, we can come back up, and we will make up all our lost ground on the other side.”

That’s the hope, anyway. The big unknown is how much damage the structure of the economy will suffer before lending confidence returns. Once businesses close their doors, it becomes much more difficult to start up again. The collapse of several large banks and Wall Street investment firms means there will be fewer lenders when the economy revives.

The outlook also depends heavily on how widely and quickly the credit panic in the U.S. spreads to the global economy. Much of the recent strength in the U.S. has come from a surge in exports driven by a weak dollar; if overseas buyers of U.S. products get hit with their own downturn, that will cut into demand, accelerating the downturn here.

Fed officials meet Oct. 29 to decide their next move. Leery of inflation, the U.S. central bank has held its overnight lending rate steady — hoping to unfreeze the lending system instead by flooding it with cash. Now, the panic of the past two weeks may have forced the Fed’s hand. Many Fed watchers believe the Fed will cut rates by another half-point at the end of the month, if not sooner.

Also in msnbc.com business Your Career: The repercussions of expressing your faith Interactive: 10 cars we’re looking forward to in 2010 ConsumerMan: Gift of giving takes on whole new meaning ‘Reaching out’ and the other worst buzzwords of the year   Video: Shoppers and shippers in a race to the finish

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Is your bank in trouble? More report bad loans Inflation stays in check as housing starts rise Economy gets tidings of hope for holidays One year later, Madoff case is far from over NYT: U.S. forecasts smaller loss from bank bailout Battle lines forming over TARP extension Obama talks of jobs plan in weekly address Productivity rises by largest amount in 6 years Bleak job scene poses challenge for Obama 'Problem' banks at highest level in 16 years Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: