Gloom deepens as the downturn accelerates

What happened

A blizzard of alarming data released this week painted a picture of a U.S. economy in free-fall, sending global stock markets into a tailspin and Obama administration officials scrambling to defend their recovery package. On the heels of last week’s report that the economy shrank 6.2 percent in the fourth quarter of 2008, the steepest fall in a quarter-century, came word that the economy may have shed some 700,000 jobs in February, while sales of American automobiles plunged 50 percent or more. Three of the four main engines of the economy—business spending, consumer spending, and exports—ground to a near-halt in the fourth quarter, with businesses slashing investment by 29 percent. Only government spending grew.

A selling frenzy gripped stock markets around the world, as investors from London to Hong Kong abandoned hope of an imminent economic recovery. The Dow Jones industrial average fell below 7,000 for the first time since 1997. Famed investor Warren Buffet, summing up the prevailing view, commented that the U.S. economy was in “shambles” and would remain so at least through 2009. “It’s pretty despondent everywhere,” said market strategist Dwyfor Evans of State Street Global Markets.

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Obama administration officials rushed to reassure Congress and the public that their recovery strategy would soon bear fruit. Treasury Secretary Timothy Geithner predicted “very substantial growth” by 2011, as the administration solved “these immediate problems we inherited.” President Obama conceded that the U.S. was in “a deep hole,” but said he was “absolutely confident” his economic policies would succeed.

What the editorials said

The markets have spoken, and Obama should heed their verdict, said The Wall Street Journal. The Dow Jones average has fallen 25 percent in two months, although “the economy has received no great new outside shock” in that time. What has changed? Investors have come to realize, with despair, that the president’s “destructive policies” are “slowing, if not stopping, what would otherwise be the normal process of economic recovery.”

It must come as a shock to Wall Street that its concerns aren’t the president’s first priority, said The Boston Globe. Obama’s “bold” plans are aimed at fixing the whole economy, not just the financial sector. His policies are “preparing the ground for the long-term changes needed to ensure prosperity in the future.” The vast majority of Americans “are willing to give the president the benefit of the doubt.” If Wall Street doesn’t share that sentiment, we suspect Obama can live with that.

What the columnists said

This week’s “petrifying” plunge in stock prices raises a question that no one wants to ask, said Niall Ferguson in The New York Times. Has the recession deepened into a depression? I’d say not yet, but that’s little consolation. We may now be in what could be termed a “Great Recession,” which likely won’t be as deep or devastating as the Depression of the 1930s, but “may prove to be as prolonged.”

And that’s the rosy scenario, said Robert Barro in The Wall Street Journal. When the current downturn is viewed against past economic declines, “there is ample reason to worry about slipping into a depression.” Only twice since 1870 has America’s consumption and economic output fallen by 10 percent or more, the worst being the Great Depression. There’s roughly a one-in-five chance that “the current recession will snowball into the macroeconomic decline of 10 percent or more that is the hallmark of a depression.”

What’s in a name? asked Alan Abelson in Barron’s. Whatever you want to call “the steadily worsening pickle we’re in,” it’s painfully bad. New unemployment claims are at their highest level in 27 years, and consumer confidence is “close to nil.” And with households suddenly determined to live within their means, don’t expect the consumer to “come riding to the rescue, waving his wand of plastic.” Consumer spending could remain anemic for years, with dire long-term consequences for profits—and the jobs they generate.

What next?

Federal Reserve Chairman Ben Bernanke warned Congress that it might have to come up with more money to fix the banking system. Failure to stabilize the banks, he said, would bring on “a prolonged episode of economic stagnation,” with “lower output, employment, and incomes for an extended period.” His one ray of hope: “Inflation is likely to remain quite low over the next couple of years.”