Alarm keeps ringing over US economy

Small businesses are struggling as banks in the United States are unwilling or unable to loan money.Photo: AFP

The credit crunch started as an obscure phenomenon in the financial sector, but as the crisis worsens, the impact on workers and businesses is causing growing alarm in the United States.
With banks unwilling or unable to loan money, and capital markets in turmoil, businesses, consumers and even US state governments such as California are struggling to find the financing they need.
The woes of the banks have so far grabbed attention, but with a 700-billion-dollar plan now in place to help the financial sector, attention is turning to the impact on the rest of the economy.
On Monday, President George W. Bush visited a group of small business owners in Texas, saying he understood the difficulties being faced by the car dealer, auto shop repair owner and restauranteurs he had just met.
"It's clear they're dealing with the effects of a credit crunch," he said. "They're having trouble getting money to be able to continue to expand their business or money to help their consumers be able to buy their products."
Credit is the lubricant that keeps the wheels of the economy turning. Companies and consumers need it to invest in the long-term and to cover short-term requirements for cash.
A survey by accountancy group Grant Thornton published Monday found that of 688 senior corporate finance chiefs interviewed, 55 percent said borrowing was more expensive and 64 percent were finding it more difficult to access credit.
To raise money on credit, companies can turn to banks for loans or issue bonds, a sort of IOU contract sold to investors that promises regular interest payments.
These options are proving extremely difficult, with banks hoarding cash and investors showing little appetite for anything other than the most safe bonds issued by the US Treasury.
"The shutdown of financing for the corporate system is particularly scary," said economist Nouriel Roubini from New York University, a former advisor to US president Bill Clinton.
"If the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely."
The restrictions on credit bode badly for workers in the already weak jobs market. The US economy has shed 760,000 jobs this year and many analysts believe it is already in recession.
Steve Bloom, a former chairman of small business group SCORE in Atlanta, Georgia, highlights the connections in the economy and the ways in which the effect of tighter credit ripples through.
"If I go out to buy a car and get turned down for credit, the auto dealer is selling less cars, which means the auto makers are selling less cars which affects the auto parts makers," says Bloom, the owner of a property business.
Total auto sales fell 26.6 percent in September, with the credit crunch cited as one of the reasons, according to industry data.
Even though small business owners are used to struggling to obtain credit -- as Bloom points out, banks are always tough negotiators -- conditions are particularly difficult nowadays.
"If you don't have cash downpayments or high credit scores, the financing market is no longer available to you," he says, adding that some companies had "hit a roadblock."
Chris Varvares, president elect for the National Association of Business Economics, said Monday in a statement that "if financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly."
A survey of 52 forecasters by his organization showed that two out of three now believed that a US recession had already begun or would begin before 2008 was over.
The problems obtaining credit are also set to hit US states and local governments, which also rely on short-term loans for cashflow and long-term loans to finance infrastructure.
California has warned the US government it may seek a seven billion dollar emergency loan to help the state pay its bills as the financial crisis bites.
Governor Arnold Schwarzenegger said the crisis meant California, the most populous and wealthiest US state, was unable to access routine financing used to make payments to schools, local government and law enforcement.
The state needs to borrow money to help bridge a gap between the outflow of funds to pay for services and the inflow of money from tax receipts.
"The question is really how long the states can hold out without access to the capital markets in the way we've become accustomed to," said Edith Behr, a public finance expert at the Moody's ratings agency.
For consumers, the impact of their dwindling stock market investments and mounting job cuts is expected to lead to weak spending in the months ahead, cutting off a key engine of the US economy.
"While the housing recession began more than two years ago, and the capex recession actually began six months ago, the real consumer recession is just starting now," Merrill Lynch economist David Rosenberg said.
Capex refers to capital expenditure -- the money spent by companies on fixed assets such as machinery.