Economy Dominates News Cycles

The past week has been filled with economic news including: the government's report on the poor results of the first quarter, Chrysler's bankruptcy and the swine flu scare. David Wessel, the economics editor of "The Wall Street Journal," helps decipher the news with Steve Inskeep.

STEVE INSKEEP, host:

We are coming to the end of a down week for the economy - disappointing economic reports, a big bankruptcy at Chrysler and of course, swine flu. So let's get some analysis now from David Wessel. He is economics editor of the Wall Street Journal and a regular guest on this program. David, good morning.

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning Steve.

INSKEEP: I trust you're covering your mouth when you cough.

Mr. WESSEL: I am, I am.

INSKEEP: Just checking, both in terms of disease and the economy as well. The government was sounding a little optimistic not too long ago. What's happened here?

Mr. WESSEL: Well, there was some bad news this week, as you reported. The government said we have had the worse back-to-back quarters in the economy since the 1950s. Businesses cut back an awful lot, exports are very weak. But there are some signs of light at the end of the tunnel, if you will. Consumer spending turned up, after falling through the floor in December. An important early warning system, the number of people filing for new claims for unemployment benefits, though still high, is trending down.

The stock markets had a couple of good months, the best two months in seven years. And business inventories are falling a lot, which tends to mean that manufactures may soon have to ramp-up production if demand hardens a bit.

INSKEEP: Now I suppose some of the bad news of this week was expected. Nobody is terribly surprised that Chrysler filed for bankruptcy for example.

Mr. WESSEL: That's right. I think one thing we know about this Chrysler's bankruptcy was that it was stage-managed in the way that nobody was shocked. It is not good for the economy to have a major company go bankrupt. It could hurt auto sales if people sort of hold off, although it may benefit competitors like Ford. And of course their workers, the immediate effect will be on the workers. Chrysler is going to shut its plants for 30 to 60 days while it goes to the bankruptcy courts. That's not good for them or for anybody else.

INSKEEP: Does the market seem to be assuming that the government's bailout plans for the auto industry in some fashion are going to work out?

Mr. WESSEL: Well, I think that it remains to be seen. They're clearly not panicked. The stock market is rising. There seems to be a lot of concern about the way the government decided to treat some of the senior debt holders. As President Obama made clear in his press conference, he considered some of them speculators for holding out and made a choice to force a deal that was more favorable to workers than the bankruptcy court would have provided. I think there's going to be a lot more anxiety about General Motors. It's a much, much bigger company and the government has been trying to find a way to keep it out of bankruptcy. So the attention moved there. And then of course there is all this worry about the banks, which is persistent.

INSKEEP: Now David Wessel, has there been an economic impact or is there an apparent economic impact from the swine flu?

Mr. WESSEL: Well, there is an immediate impact of course on travel and tourism. You saw all these people cutting their trips to Mexico and more people stay home, even if it is a small number. But I think the real effect will depend on how bad the swine flu gets. If this is as bad as it gets, we'll be talking about something else in a month. If it becomes a pandemic and people are shutting schools and businesses and staying home, that of course has a very strong economic effect and not a good one.

And then it really is not a convenient time to have anything else to sap people's confidence at a time when our confidence in the entire system of capitalism seems to be under assault.

INSKEEP: Now let's talk about confidence in banks - the first results of the bank's stress tests came out at the start of the week. Do you feel like, you know anything, you didn't know about the banks?

Mr. WESSEL: We don't very much yet. What the government did was explain to us the process by which they conducted the stress test and some of the details. They're now in talks with each of the 19 big banks, and they tell us that some time early next week we'll get a report on which ones of them have enough capital to get through a bad economic storm, and which ones are going to need to raise more capital either privately or from the government.

The rumor is that six of the 19 don't have enough capital to get through and will have to raise some. So I think that's still a big question mark. And whether this stress test process will make investors and depositors and businesses feel more confident about the banks, or whether it will make them feel less confident in the government's ability to manage this is still very much an open question.

INSKEEP: David, thanks very much.

Mr. WESSEL: A pleasure.

INSKEEP: David Wessel of the Wall Street Journal.

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