Obama inherits weak economy awash in red ink

updated 11:06 a.m. ET Nov. 5, 2008

WASHINGTON - To the victor goes the mess.

Barack Obama’s presidential election victory comes with an albatross of a prize — an economy beset by a stubborn housing slump and the worst financial crisis in 70 years.

Consumers and businesses are sharply reducing their spending and the government is awash in red ink.

“He will inherit an economy that is in recession and ... is likely to get worse before it gets better,” said Stuart Hoffman, chief economist for PNC Financial Services.

The government said Wednesday it will sell $55 billion in bonds next week as part of a massive borrowing to pay for its financial rescue programs. Borrowing is expected to reach a record $550 billion in the final three months of the year.

The Treasury Department said it is bringing back its three-year notes, selling them monthly to help cover the increased borrowing needs, and will auction $25 billion of them on Monday. The government also will offer $20 billion in 10-year notes on Nov. 12, and $10 billion in 29 3/4-year bonds on Nov. 13.

Officials project the government will need to borrow an additional $368 billion in the first quarter of 2009.

Meanwhile, the Institute of Supply Management on Wednesday said its gauge of activity in the U.S. services sector contracted sharply in October as new orders and employment fell. The trade group of purchasing executives said the services sector index fell to 44.4 in October from 50.2 in September.

Wall Street economists surveyed by Thomson Reuters expected a reading of 47.5. A reading below 50 signals contraction.

A manufacturing report issued Monday by the same organization showed the worst reading since September 1982, when the country was in a deep recession.

Asian stocks rallied earlier Wednesday as investors there were hopeful Obama would tackle the U.S. financial crisis with renewed vigor, although some voiced concerns that a Democratic president and Congress might turn more protectionist. Japan’s Nikkei 225 stock average climbed 4.5 percent, while Hong Kong’s Hang Seng index rose 3.2 percent.

Earlier Tuesday, the another poor report on the state of the U.S. economy was released. The Commerce Department reported factory orders dropped 2.5 percent in September from August, more than three times as much as analysts had expected. Excluding autos and aircraft, orders fell 3.7 percent, the steepest drop since 1992, when the department began tracking sector-specific changes.

The weakness was led by a heavy drop in nondurable goods orders, which fell 5.5 percent. That included a 17 percent drop in the value of petroleum and coal products, reflecting the decline in oil and gas prices in September.

Analysts said the report wasn’t as bad as it looked, because much of the decline was driven by the drop in the value of oil and gas orders.

But orders for non-defense capital goods excluding aircraft, considered a good indication of business investment plans, fell 1.5 percent. That follows a 2.3 percent drop in August and indicated companies are cutting back on their investments.

“Corporate America is buying into the recession story, and they are paring their investment spending accordingly,” said Ken Mayland, president of ClearView Economics.

Automakers also reported terrible October sales figures on Monday, with sales down 45 percent at General Motors Corp., 30 percent at Ford Motor Co., 25 percent at Honda Motor Co. and 23 percent at Toyota Motor Corp.

The government reported last week that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 0.3 percent in the July-September quarter. Two straight quarters of lower GDP generally mean a recession, and many economists expect the fourth quarter to be worse than the third.

The nonpartisan Committee for a Responsible Budget estimates all the government economic and rescue initiatives, starting with the $168 billion in stimulus checks issued earlier this year, total an eye-popping $2.6 trillion.

Besides the borrowing numbers, Treasury on Monday released estimates by major Wall Street bond firms projecting that total borrowing for this budget year, which began Oct. 1, will total $1.4 trillion, nearly double the previous record.

Major Wall Street firms projected the deficit will hit $988 billion for the current budget year, more than twice the record. In July, the administration projected a deficit for this year of $482 billion, but that was before the financial crisis erupted in September.

Supporters of the government rescue packages argue that the ultimate cost to taxpayers should end up being a lot smaller, partly because the Federal Reserve is extending loans to banks that should be paid back.

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