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Evidence of a recession piles higher with new data
WASHINGTON — Evidence of a recession piled ever higher Friday, with new figures showing Americans are spending less and gloomy about the economy, while the government signaled it won't buy stock in the financing arms of auto companies to prop them up. The Commerce Department reported consumer spending dropped a sharp 0.3 percent in September while their incomes, the fuel for future spending, managed only a small 0.2 percent gain.
That followed a report a day earlier that the U.S. economy shrank by 0.3 percent in the third quarter. The accepted definition of a recession is two straight quarters of a shrinking economy.
Closing out the worst October in 21 years but one of the best weeks ever, investors did some bargain shopping on Wall Street, snapping up stocks that have plunged in value. The Dow Jones industrial average gained nearly 145 points.
Meanwhile, the outgoing Bush administration sent signals to automakers and other industries hoping for government purchases of their stock that they probably won't qualify for the program.
Administration officials, who spoke on condition of anonymity because the program is still being put together, said it was unlikely the auto companies would be able to qualify for direct government purchases of stock in their auto-financing arms as part of the $250 billion stock purchase program.
They could still be eligible for government purchases of bad assets, such as auto loans, under a separate program that is expected to spend $100 billion initially. The government plans to buy stock in banks and lift bad assets on their books as part of the financial system bailout.
The wrangling over the broader rescue program continued, with Democrats stressing Congress wants the package to be used to pump new loans into the economy, not diverted to stockholders or executives or to buy other banks.
"I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed," said House Financial Services Committee Chairman Barney Frank, D-Mass. He announced hearings on the rescue package Nov. 12 and 18.
The Treasury Department said it would extend a Nov. 15 deadline for banks that do not have publicly traded stock to apply for the government stock-purchasing plan _ a plan that could extend to 6,000 banks.
The bank rescue is intended to shore up financial companies and get lending, the lifeblood of the economy, going again.
Meanwhile, Federal Reserve Chairman Ben Bernanke said in a speech that whatever system is constructed following the government takeover of mortgage giants Fannie Mae and Freddie Mac must have better safeguards to make sure it can work during times of stress.
Bernanke said the credit crisis had exposed serious deficiencies in areas beyond home loans.
"The boom in subprime mortgage lending was only part of a much broader credit boom characterized by underpricing of risk, excessive leverage and the creation of complex and opaque financial instruments that proved fragile under stress," Bernanke said.
As the nation learns more about what went wrong, the economy grows ever bleaker. The Commerce Department report that consumer spending fell by 0.3 percent in September followed two months in which spending was essentially flat.
A separate survey released Friday by the University of Michigan and Reuters showed consumer confidence in October fell to 57.6, the biggest one-month drop in the survey's history, which dates to 1978.
And economists expect Americans to cut back further. The nation's financial outlook is dimming just as the critical holiday shopping season looms, and stores are bracing for one of the worst on record.
David Wyss, chief economist at Standard & Poor's in New York, said he believed the recession could turn out to be the longest in the post World War II period.
"Things are still looking soft and the light at the end of the tunnel is a long way off," Wyss said.
In a separate report, the Labor Department said the wages and benefits of U.S. workers rose by a modest 0.7 percent in the third quarter, the same as in the first and second quarters.
The spending report showed that an inflation gauge tied to spending edged up just 0.1 percent in September. But prices over the past year are up by more than 4 percent, and inflation is outside the Fed's comfort zone.
Still, the central bank is expected to focus on fighting to keep the country out of a severe recession _ not raising rates to fight inflation.
The Fed cut a key interest rate by a half-point on Wednesday to 1 percent, tying the lowest level in the past half-century. Analysts said if the economy remains weak, the Fed could well cut rates again at their last meeting of the year on Dec. 16.
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Associated Press Writers Jennifer Loven and Christopher Rugaber in Washington contributed to this report.
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MARTIN CRUTSINGER | October 31, 2008 11:13 PM EST |
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