No end in sight for job market woes

Treasury Secretary Henry Paulson on Wednesday said the best option for the future of Fannie Mae and Freddie Mac, which have been under government control since September, could be to run the mortgage giants like public utilities. The new companies would be privately owned, but purchase and securitize mortgages with a credit guarantee backed by the federal government and governed by a rate-setting commission that would establish a targeted rate of return. Still, Congress and the Obama administration must decide the proper role government should play in supporting home ownership, he said.

Consumers and companies are folding under the negative forces of the collapsed housing market, a global credit crunch and the worst financial crisis since the 1930s. The recession, which started in December 2007, already is the longest in a quarter-century.

The expectation of more job losses ahead “will only perpetuate the vicious downward cycle propelling the economy,” said Bernard Baumohl, chief global economic at the Economic Outlook Group.

“As the number of people without jobs accelerates, so will the retrenchment in households’ spending. If consumers cut back more, business sales and earnings shrink further. The collapse in profit margins will force companies to carry out yet another round of layoffs, which only adds more momentum to the destructive cycle,” Baumohl said. “Unfortunately, that’s the scenario we see ahead.”

Against that backdrop, some companies are realizing they need to cut costs more than they thought just a few months ago to cope with the carnage.

Alcoa’s announcement earlier this week that it would lay off 13,500 workers marked yet another attempt for the Pittsburgh-based company to slim down. It had unveiled a series of cost-cutting measures in the fall.

Cessna Aircraft Co. in Wichita, Kan., said this week it is planning a second round of layoffs as the sinking economy bites into orders for new planes. Textron Inc.’s Cessna last month issued a 60-day layoff notice to about 500 Wichita workers and another 165 workers in Bend, Ore.

Obama is proposing a mammoth $775 billion package of tax cuts and government spending over two years to revive the moribund economy. With add-ons by lawmakers, the package could swell to $850 billion, his advisers say.

“By now we all know that we are facing a crisis in our economy, one that requires immediate and decisive action to spur the creation of new jobs,” Obama said Wednesday.

Even with a big government stimulus, economists still believe the unemployment rate will keep climbing, hitting 8 or 10 percent by the end of this year. Obama’s economic advisers estimate that a $850 billion recovery package would lower the jobless rate to about 7.4 percent and create 3.2 million jobs by the first quarter of 2011.

Obama, who takes over Jan. 20, said Wednesday his recovery plan would “save or create” 3 million jobs.

Despite a flurry of radical government relief efforts and the Fed last month slashing a key interest rate to an all-time low, Federal Reserve officials fear the economy will be stuck in a painful rut for some time.

“The economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to a Fed document of its closed-door December meeting released Tuesday. In fact, some officials worried about the “distinct possibility of a prolonged contraction.”

And, “amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010,” the Fed warned.

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