Economy Continues Downward Spiral

The economic news just keeps getting worse. The stock market is at its lowest level in more than five years. The number of homes being built continues its downward spiral. Retailers are predicting a miserable holiday season. David Wessel, economics editor of The Wall Street Journal, tells Steve Inskeep he's watching for signs of deflation.

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STEVE INSKEEP, host:

It's Morning Edition from NPR News. Renee Montagne is on an assignment. I'm Steve Inskeep. And let's take a moment to understand some of what investors must be seeing. We'll ask about some of the trends that are driving the stock markets lower. The Dow is at its lowest level in more than five years. Citibank had its worst one-day decline ever. And in Asia today, stock markets in Tokyo and Hong Kong lost seven percent of their value. Maybe the only consolation is that seven percent of the market's value isn't as big as it used to be. David Wessel is economics editor of The Wall Street Journal and a regular guest here. David, welcome back.

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

INSKEEP: What numbers are you following to get a sense of where the economy is going?

Mr. WESSEL: Well, I think one of the most interesting numbers that's come out this week is the inflation number. You know, just a few weeks ago, we were worried - or the Fed was worried - about inflation going up.

INSKEEP: Overheating the economy, flooding the economy with money with this bailout and everything else.

Mr. WESSEL: That's so yesterday. The latest inflation numbers are negative. The consumer price index fell one percent. That's a sign of just how serious the problems have become. And you now have discussions, serious discussions, about is there a risk of deflation, falling prices, which is a very - can be a very devastating disease for an economy.

INSKEEP: It sounds very nice if you have money because your money goes farther, but I guess it means that there is no point in investing or trying to sell stuff if you know prices are continually falling.

Mr. WESSEL: It's also very bad if you are a borrower because you have to pay back loans at the nominal amount, at the face value of the loan, with money that is more expensive. It's not a good thing.

INSKEEP: So inflation has gone from being a worry to being OK to actually being a different kind of worry. What other numbers are you looking at?

Mr. WESSEL: Well, I think the most important number to look at is the forecast for how much the economy is contracting in the current quarter, the fourth quarter of the year. Many people are expecting a contraction at a four percent annual rate. What we're looking at now is a recession that is probably as bad as the one of the early '80s, and maybe even worse. And that's despite the fiscal stimulus and despite the interest rate cuts we've seen in the past.

INSKEEP: A four percent decline in the current quarter. Can you give me some measure of what that means? I mean, losing four percent doesn't sound that bad on the surface, and yet it's considered very grave.

Mr. WESSEL: If the economy were to contract at a four percent rate for an entire year, it would mean there was $560 billion less goods and services for Americans this year. The president-elect is taking office at a time when the economy is as fragile as any time since Roosevelt took over. That is not an exaggeration.

INSKEEP: So what's happening on the stock market with all this news?

Mr. WESSEL: Well, the stock market took a long time to figure out that things were bad, and then it fell with a huge thud. So far this year, stocks are down about 35 percent. And every time they have an up day, people say, oh, this is the bottom, but so far it seems premature to say it's at the bottom. It's quite frightening.

INSKEEP: You mentioned that this new administration is coming in at a time of great fragility, which almost seems like a euphemism, a polite word, for the kind of trouble that you're talking about. What are their options given that the current administration is already spending and loaning hundreds of billions of dollars at a time?

Mr. WESSEL: I think they have to do at least three things. One thing is - it sounds like a kind of cheating, but a lot of this is about confidence, about assuring consumers and businesses that we're going to get through this all right. So I expect that President-elect Obama will do things that are deliberately aimed at making us feel better - who he appoints to positions, how he describes the economy, the sense that I'm in charge, we are going to take care of this. That's important. The second thing is we're going to see another huge fiscal stimulus. The Wall Street Journal had a gathering of corporate CEOs this week, and they said the fiscal stimulus should be at least $300 billion. That's twice as big as the last one.

INSKEEP: Three hundred billion dollars. We're talking about rebate checks to taxpayers and that sort of thing, as was done a year ago.

Mr. WESSEL: Not necessarily tax rebate checks. I think we might be seeing tax cuts of some kind, and I think we're going to see an increase in government spending, perhaps some of it on infrastructure that will be spent over the next year or two. And the third thing is I think that the new administration is working on ways to attack the housing problem directly to deal with foreclosures and to help people whose mortgages are worth much more than the value of their houses.

INSKEEP: So do you ever feel like ducking under your desk?

Mr. WESSEL: You know, I vacillate between being frightened by how bad the surprises are and how what seemed unimaginable a month ago is happening now, on one hand, and also being quite impressed by the diligence of the people in the government who are charged with this and how creative they have been and inventive at trying to respond to it.

INSKEEP: David Wessel of The Wall Street Journal, good to talk with you again.

Mr. WESSEL: A pleasure.

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