Obama to inherit feeble economy awash in red ink

[November 05, 2008]  WASHINGTON (AP) -- 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 current administration on Wednesday will detail its plans to borrow a record $550 billion in the final three months of the year as a down payment for the various financial rescue packages put into effect in response to the global crisis.

A Treasury Department official on Monday projected the government would need to borrow an additional $368 billion in the first quarter of 2009. Treasury is expected to bring back its three-year notes to help cover the increased borrowing needs.

Still, investors seemed to draw hope Tuesday from the selection of a new presidential administration, while shrugging off the latest in a series of grim economic reports. The Dow Jones industrial average surged more than 300 points. The Dow and the other major stock indexes all finished with gains of more than 3 percent.

Asian stocks rallied Wednesday on the back of Wall Street's gains and renewed investor confidence. Asian investors 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.

Futures trading fell after initially rising. Dow futures fell 126, or 1.3 percent, to 9,461, while S&P futures declined 1.5 percent to 988.4.

Analysts said investors appeared to be looking forward to the end of political uncertainty and hoping the new U.S. president will move to boost the economy, which got another bit of dismal news Tuesday.

The Commerce Department reported Tuesday 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.

The factory orders report came a day before the release of the Institute of Supply Management's gauge of activity in the U.S. services sector for October. That index will be released Wednesday and is expected to fall, though not as steeply as its sister manufacturing index did Monday, when it dropped to its lowest level since the country's last deep recession, the 1981-82 downturn.

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.

[Associated Press; By CHRISTOPHER S. RUGABER]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.