MADELEINE BRAND, host:

From NPR News, this is Day to Day. As Congress debates that huge Wall Street bailout, more bad news keeps trickling in on the economy. A report out today shows factory orders dropped in August by the largest amount in nearly two years, and last month's auto sales were bleak as well. Marketplace's Janet Babin is here now, and, Janet, let's start with the factory orders report. What does that tell us about the economy?

JANET BABIN: Well, things are not looking too good, Madeleine, according to this report. The Commerce Department came out today with a report that shows orders for manufactured goods dropped four percent in August from July. And economists had predicted a decline, but they thought it would be more like 2.5 percent.

So these numbers are much worse than expected. Orders for planes are down 38 percent, and demand for cars fell by more than 10 percent, and that's the worst drop in almost six years. Now, economists think the numbers are a sign that companies are having trouble getting credit, even that short-term credit they need to pay employees or pay accounts receivable, things like that. And that's causing them to reign in spending and shutter any plans they might have to expand. And, of course, they can't extend any financing to customers, either.

BRAND: And tell us about car sales. Those aren't doing so well. What's going on there?

BABIN: Right, the numbers on car sales out yesterday were devastating. The sales dropped below the one million mark for the first time in more than 15 years, so that's back to 1993. A Ford Motor executive called the sales figures yesterday tantamount to a natural disaster. And car dealers are again blaming this tight credit market for these declines. They said customers are already having a hard time qualifying for car loans, so they're not being able to purchase cars.

BRAND: So all these factors, do they indicate that we are slipping into a recession? And if so, what can the Federal Reserve do about it?

BABIN: Well, I put that exact question to Jeff Frankel. He's a professor at Harvard University's Kennedy School of Government.

Dr. JEFF FRANKEL (Kennedy School of Government, Harvard University): It's looking like a recession to me, not just because of those most recent numbers, but accumulating all the evidence. And at this point, I don't think there's a whole lot the Fed can do. I mean, they have used monetary policy very aggressively over the last year.

BABIN: And the Fed can't do much more, according to Frankel. He says the credit market is so seized up, cutting the federal funds rate probably wouldn't help. And then people might really panic. So he thinks the Federal Reserve will probably keep rates steady at its next opportunity to change them, although he says, you know, he's just guessing.

Frankel says the problem with credit isn't this rate, it's this huge premium that everyone's charging each other to borrow, even short-term. And Federal Reserve data out today showed that the U.S. commercial paper market, that business to business lending for short term loans, did shrink dramatically this week for the third straight week. And not to pile on here, Madeleine, but this credit market is expected to lead to layoffs, and the government's scheduled to release employment numbers tomorrow. So we'll have more on that.

BRAND: All right. And we'll go to you for that tomorrow. Thank you, Janet. That's Janet Babin of public radio's daily business show, Marketplace.

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