Economy won’t wait for Obama

While President-elect Barack Obama might like to sit back and bask in his victory for a few days, the quickly unraveling economy won’t let him relax for long, analysts say.

Less than a day after his election, signs of the long-running economic emergency re-emerged with reports that the nation’s vast services sector fell into recession last month amid a loss of nearly 200,000 jobs - news that sent the Dow Jones Industrial Average plunging nearly 500 points in its biggest postelection loss.

Having to contend with the daily gyrations of the markets and economy will now become a preoccupation of Mr. Obama’s, and he will have to work with a reluctant President Bush to try to pass a second economic-stimulus bill that House Speaker Nancy Pelosi, California Democrat, has been promising in a lame-duck session of Congress.

Economists say Mr. Obama will have to quickly appoint a Treasury secretary who within weeks can start taking over the reins of the massive and intricate web of government programs that are keeping the financial markets and economy on life support.

He may have only weeks to forge a deal to keep one or more of Detroit’s Big Three automakers from falling into bankruptcy - something many analysts say could happen even before he takes office.

Mrs. Pelosi underscored the gravity of the auto industry’s difficulties by agreeing to meet Thursday with the top executives of General Motors Corp., Ford Motor Co. and Chrysler LLC. According to the Associated Press, citing two sources familiar with the plans who spoke on the condition of anonymity, the private meeting also will include the United Auto Workers president and will cover the credit crisis and a possible government bailout of the auto industry.

“Obama has to deal with a hyper-mess, starting before he is sworn in,” said Edward Hadas, an analyst at Breakingviews.com. But the economic chaos of the past two months also presents the president-elect with a rare opportunity to make a sweeping impact on the economy by restructuring and redrawing the rules for entire sectors from autos to banking and Wall Street.

“This feel-good politician could become a financial statesman” with an impact on markets around the world, Mr. Hadas said. Mr. Obama has a major advantage over any other world leader in that voters blame the current administration for the economy’s woes and have given him essentially a blank check to try to remedy them.

“President-elect Obama cannot indulge in a measured transition,” said Peter Morici, a business professor at the University of Maryland. “He is compelled by events to act decisively, through quick selection of a Treasury secretary who can work with incumbent Henry Paulson on the banking crisis and by helping House Speaker Nancy Pelosi fashion a stimulus package that Congress should pass in a postelection session.”

“A recession of unusual proportions is unfolding,” Mr. Morici said.

The Institute for Supply Management on Wednesday reported a sizable slump in the services sector, which makes up 60 percent of the economy, including a plunge in employment, while economists are forecasting a big loss of 200,000 jobs in an employment report due out Friday. Foreshadowing that report, ADP, a payroll-services firm, reported a cut of 157,000 jobs last month that was the biggest since November 2002.

“A second stimulus package in multiple installments to limit the depth of the recession is necessary,” Mr. Morici said, and should be focused on generating jobs and economic activity through infrastructure spending rather than giving the economy a one-time boost through tax rebates as Congress did earlier this year.

A $300 billion package being drafted by congressional Democrats focuses on funding construction projects and also is likely to include additional loans for the rapidly declining automakers to stave off further big job losses at auto plants.

“The lesson of the last stimulus package is clear,” Mr. Morici said. “Too much was spent on imports at the mall, and the money did not do much to stem job losses, even in retailing.”

The selection of the next Treasury secretary is considered critical to ensure the smooth running of myriad programs set up by the Treasury and Federal Reserve this year to nurse dysfunctional lending markets back to health and prop up failing financial firms like American International Group.

Story Continues →