Economist: Crisis to stretch months

Americans can expect the U.S. economy to remain weak for at least the next several months, Wachovia's chief economist told a roomful of somber financial executives Thursday.

John Silvia displayed a series of slides on broad economic indicators over the last several years.

Nearly all held bad news: Unemployment claims? Up. Manufacturing production? Down. Inflation? Inching up. Consumer confidence? Way down. Corporate profits? Expected to be negative for the latter half of the year, a rarity.

And in perhaps the most telling indicator of consumer confidence, this year's Christmas shopping season, Silvia said, “is going to be disappointing.”

Silvia was addressing the Charlotte-based Southern Carolinas chapter of Financial Executives International, an organization that accepts only chief financial officers, controllers or treasurers – the people who make financial decisions for companies, and people who have as good a view as anyone of the future, long- and short-term, of the economy.

Several of the 80 or so members who showed up at The Westin hotel said they were worried less about the highly publicized fluctuations of the stock market this week and more about sags in traditional indicators of long-term economic health, such as the housing market and banks' extension of credit.

“I think we're all appropriately concerned about the overall economy. …What the stock market does on any given day is not of great concern,” said Kirk Wall, chief financial officer for Aramark Healthcare.

“Plenty of companies are still showing strong cash flow, and they'll be the winners. They'll always be the winners.”

Still, Silvia said, Americans will have to weather at least several more months if not a few more years of hard times. A lot will depend on the market's reaction to whatever additional regulation either a McCain or Obama administration would place on it, he said.

Silvia knows about the intersections of the corporate and governmental worlds: Before joining Wachovia in 2002, he worked as a senior economist for the U.S. Senate Joint Economic and Banking, Housing and Urban Affairs committees.

Other highlights:

For all the politicians' talk about keeping American jobs and capital in the country, it's easy to forget that foreign investment accounts for about a third of the overall economy, he said. “People can yell and scream about energy independence,” he said, but “the reality is, we depend on foreigners for capital.”

The federal government's recent bailouts of mortgage-lending giants Fannie Mae and Freddie Mac may have warded off a depression in the short term, but they raise serious concerns about corporate responsibility, he said. Silvia referred to what economists call the “moral hazard” of large companies' apparent insulation from risk through bailouts: There's no incentive to operate responsibly if you know the government will catch you if you fall.

The nation will have to figure out how to shore up Medicare and Social Security as baby boomers enter retirement age.

“Those are real bills coming down the pike. How do we deal with that as a society?” Silvia said.

“I don't know. It'll be tough.”