I think we can guess what is going to be on the top of the list of concerns for attendees at tonight's Town Hall debate between John McCain and Barack Obama. Not Bill Ayers, not Jeremiah Wright, not Sarah Palin's war against the elite liberal media, and not John McCain's general grinch-who-stole-the-election demeanor. The economy is the No. 1 issue on voter's minds, and today's economic news only reinforces that.
Neither the promise of a rate cut nor the announcement that the Fed would jump into the market for short-term lending to American businesses appears to have appeased bearish sentiment on Wall Street. On Tuesday, major stock indexes all closed down sharply. The Dow fell 508 points, closing under 9,500.
Is the downward pressure motivated by fears that the credit crunch will take down some more big banks? Or are the hordes of hedge funds unloading assets taking down the market with them? There's no way to know for sure.
But we don't really need a complicated explanation. The U.S. economy is not in happy place. Listen to Fed chairman Ben Bernanke, speaking today to the National Association for Business Economics on "Current Economic and Financial Conditions."
Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets. However, the slowdown in economic activity has spread outside the housing sector. Private payrolls have continued to contract, and the declines in employment, together with earlier increases in food and energy prices, have eroded the purchasing power of households. This sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending. Indeed, since May, real consumer outlays have contracted significantly. Meanwhile, in the business sector, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on investment spending as well.
The intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead. Even households with good credit histories are now facing difficulties obtaining mortgage loans or home equity lines of credit. Banks are also reducing credit card limits, and denial rates on automobile loan applications reportedly are rising. Businesses, too, are confronting diminished access to credit. For example, disruptions in the commercial paper market and tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses such as payrolls and inventories.
All told, economic activity is likely to be subdued during the remainder of this year and into next year. The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth.
Subdued? Bernanke has a habit of understatement, but "subdued" doesn't seem to be quite the right word for what's going on right now.