- The Washington Times - Tuesday, September 30, 2008

Five hours before Congress defeated a $700 billion plan to bail out the U.S. financial system, the government reported further evidence that the U.S. economy is headed for a recession - if an economic downturn has not already begun.

• After declining during June and July, consumer spending, adjusted for inflation, was flat in August, while after-tax personal income plunged for the third month in a row.

• Industrial output from the nation’s factories, mines and utilities is lagging nearly 2 percent below its December level.

• The U.S. economy has lost jobs every month this year, with total employment down more than 600,000 jobs since the beginning of January.

“This can no longer be described euphemistically as ‘downside risks to growth,’” said Brian Bethune, chief U.S. economist for Global Insight, referring to Federal Reserve Chairman Ben S. Bernanke’s testimony last week before Congress’ Joint Economic Committee. “It is a recession reality that needs to be confronted with a more aggressive policy response.”

In an interview, Mr. Bethune called upon the Fed to lower its target overnight interest rate by at least half a percentage point to 1.5 percent.

American University finance professor Gerald Martin talks about the Wall Street meltdown:

Consumer spending now accounts for more than 70 percent of gross domestic product. Consumption, which grew throughout the eight-month recession in 2001, has not declined in any quarter since 1991. But it is poised to take a plunge. Global Insight projects that personal consumption will fall by 2.2 percent during the third quarter, which ends Tuesday.

“Even the normally stable consumption of services has taken a pretty sharp hit in recent months,” said Adam York, an economic analyst at Wachovia Bank. “We expect that real consumption will decline outright in the second half.”

The outlook for business investment is not rosy, either. Business spending on equipment and software has already fallen two quarters in a row, including a steep decline of 5 percent during the April-to-June period. The Commerce Department reported last week that orders for non-defense capital goods decreased 7.5 percent in August, while orders for all big-ticket manufactured goods suffered the biggest percentage decline since January.

Investment in housing has been plunging for 2 1/2 years. Yet new-home sales tumbled 11.5 percent in August and were down 34.5 percent from year-earlier levels. The annual rate of new-home sales hit a 17-year low last month, while the median sales price for a new home dipped to a four-year low.

The median price for existing homes fell by 9.5 percent during the 12 months ending in August, the biggest decline on record. In the West, the median price of existing homes has fallen 24 percent during the past year.

In addition to the plunging values of homes and 401(k) retirement plans, household budgets have been constrained by rising unemployment rates, which hit 6.1 percent nationally in August.

Meanwhile, the nation’s export sector, which was responsible for the entire growth rate of 2.8 percent during the second quarter, may be losing steam as foreign nations battle their own recessionary pressures.

The $700 billion bailout plan, even if it passes, will face stiff headwinds as a deteriorating economy exerts greater pressure on a stressed financial system.

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