The worst monthly drop on record for retail sales set off new alarm bells about the economy Friday, stepping up pressure on policymakers to figure out how to combat what increasingly looks to be a severe recession.
Confronting opposition by the Bush administration, Democrats in Congress said they would try next week to pass $25 billion in emergency loans for the auto industry, so wobbly that one or more of Detroit's Big Three could go under.
And the Federal Deposit Insurance Corp., also breaking with the administration, proposed having the government spend $24 billion to back mortgages and help 1.5 million Americans avoid foreclosures.
The policy differences highlighted both the waning power of President Bush and the growing concern about a long and painful recession ahead.
A Commerce Department report showed consumers in full flight, with retail sales falling a record 2.8 percent in October from September. Plunging auto sales led the way, but there were declines in virtually every spending category.
“Consumers are battening down the hatches, and this reflects the depth of the downturn,” said Mark Zandi, chief economist at Moody's Economy.com. “All households are panicked and cutting back – not just lower and middle-income families who are struggling with a bad job market and falling home values, but upper-income families who are upset with their diminished nest eggs.”
Wall Street had another day of lurching highs and lows. The Dow Jones industrial average, which was higher for the day as late as 45 minutes before the closing bell, took a nosedive and finished down 338 points, or nearly 4 percent.
As world leaders arrived in Washington for a summit on how to deal with the global economic crisis, Bush urged patience in his weekly radio address, saying “our actions are having an impact.”
But with a steady stream of worse-than-expected economic data, Democrats in Congress and regulators at the FDIC are signaling more needs to be done.
The Senate will begin debate Monday and hold a test vote two days later to try to break an expected filibuster on a bill that would provide the troubled auto industry $25 billion in new loans, Majority Leader Harry Reid said.
The White House supports speeding the release of $25 billion in existing loans to the Big Three – General Motors Corp., Ford Motor Co. and Chrysler LLC – but opposes using part of the $700 billion financial bailout for the automakers.
Meanwhile, the FDIC put forward a proposal that would tap into the $700 million bailout package and use $24billion to help households avoid foreclosure. The plan would guarantee 2.2 million modified loans – mainly risky loans made to borrowers with weak credit or small down payments – through the end of next year.
Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable and banks would receive government guarantees that supporters say will make them more willing to modify the loans.
While supporters say the proposal by FDIC Chairman Sheila Bair is urgently needed in the severe housing downturn, the administration continued to voice opposition. Neel Kashkari, the Treasury official who heads the rescue program, said the bailout was designed as an investment program, while the Bair proposal would involve spending government money outright.
The automakers and homeowners in danger of foreclosure were not the only people seeking assistance. The mayors of three large cities – Philadelphia, Atlanta and Phoenix – said Friday that the federal government should use a part of the $700 billion to meet pension costs, make infrastructure investments and deal with severe cash-flow problems stemming from the economic downturn.
Philadelphia's mayor, Michael Nutter, said he wanted to make sure “cities and metro areas are at the table, that their voices are being heard, that our challenges and problems are well understood, so that we can get relief.”
President-elect Barack Obama, who takes office Jan. 20, has not proposed or endorsed a specific aid plan, but he has called for some help for states and local governments in hopes they can avoid raising taxes or cutting jobs.
In Frankfurt, Germany, Federal Reserve Chairman Ben Bernanke told other central bankers financial markets remained under “severe strain.” Sandra Pianalto, the head of the Fed's Cleveland regional bank, was more blunt, saying the incoming data indicated “the economy is in a recession” and “the signs point to a recession beyond just a garden variety downturn.”
The economy shrank slightly in the third quarter, and many economists believe the downturn has accelerated since then. Some are forecasting the contraction will continue into mid-2009, which would make it the most serve recession since 1981-82.
In what has become a steady stream of layoff notices, Sun Microsystems Inc. announced Friday that it plans to cut up to 6,000 jobs.