The day after Barack Obama was elected president, at least 33 more bankruptcies were filed in Sacramento. Foreclosures continued their assault on the region’s housing market. And California’s unemployment rate was still more than 7 percent.
In other words, for all of Obama’s campaign talk about using the power of the government to revive the economy, it’s a near certainty that he’ll be unable to reverse the downturn quickly.
“The U.S. economy is like an aircraft carrier – you cannot turn it around on a dime,” said economist Sung Won Sohn of California State University, Channel Islands. “He’ll try to minimize the pain, but I don’t think he can fix the economy in a hurry.”
Yet there was a feeling that the conclusion of the election campaign could bring some much-needed certainty to the struggling economy. Steven Krohn, a Sacramento economist and real estate broker, said the seemingly endless campaign made consumers wary of making big-ticket purchases. Now that it’s over, confidence could improve.
“It’ll be interesting to see this weekend how many people go through open houses and that sort of thing,” said Krohn, who’s with the Real Estate Group Inc. of Sacramento. “My expectation is that there will be more.”
It’s clear the president-elect will inherit a deeply troubled economy. Right on cue, the Dow Jones fell 486.01 points Wednesday, and cable business-news channel CNBC flashed a headline saying, “Obama honeymoon over.”
The market dropped partly in reaction to a troubling economic report: The Institute for Supply Management said the nation’s service sector shrank in October at an alarming rate. A $2.5 billion loss reported by GMAC didn’t help, and investors were fretting about the next batch of national unemployment statistics, due Friday.
In the Sacramento area, where unemployment has risen to 7.4 percent, the severity of the downturn is already clear.
“People are more cautious, much more cost-conscious,” said Jean Hawkins, owner of Valley Oak Home Appliance Center in Elk Grove.
Ward Smith of J. Smith & Sons, a home-entertainment firm in Natomas, said he believes things could improve – not because the election was over, but because the financial markets appeared to be stabilizing, Wednesday’s fall notwithstanding.
“The phones are ringing a little more, in the last couple of days anyhow,” he said. “No big deals, but I did get a call from a developer saying they’re going to start a project. Maybe the logjam is (easing) one log at a time.”
Obama’s election will surely mean a more pro-active government, particularly when it comes to regulating financial markets, Sohn said. The $700 billion rescue package enacted in October could be just the beginning of an era in which the government involves itself more directly in the economy, he said.
That likely will include another stimulus package, perhaps one that combines tax relief with an extension of unemployment and food-stamp benefits, said Palo Alto economist Stephen Levy. That would worsen a budget deficit already estimated at $1 trillion, but Levy said it’s worth it to pump some life into the economy.
“I don’t think you worry about the deficit in the short term,” said Levy, director of the Center for Continuing Study of the California Economy. “We’re supposed to be getting the economy back on track.”
In his campaign, Obama promised a middle-class tax cut. For instance, those earning $40,000 to $70,000 a year – a group including 2.9 million Californians – would save $2,200, according to an estimate by the Tax Policy Center. He also wants to raise taxes on those making more than $250,000 a year.
Levy also would expect some financial aid from Washington to cash-strapped states like California, where the deficit is ballooning into the billions. And he foresees more spending on “bread and butter infrastructure.”
But the sheer size of the deficit makes it likely Obama will have to postpone at least some of that spending, Sohn said.
Already the United States is borrowing $2 billion a day from foreigners, and that can’t go on forever, he said.
“America is so dependent on foreign credit,” the CSU economist said. “Till now we’ve been kind of gorging on it, (but) it may not be as freely available as it has been in the past.”
One program that may get delayed is Obama’s plan to invest billions in “green” technology.
“Clearly, hard decisions are going to have to be made,” said Peter Van Deventer, chief executive at SynapSense Corp., a young Folsom company that develops energy-efficiency sensors for data centers.
But Deventer believes green companies like his are gaining traction regardless of whatever investments the Obama administration makes.
What’s clear is that the Sacramento economy won’t improve meaningfully until the real estate market recovers. Obama has talked about taking steps to help homeowners, including a 90-day foreclosure moratorium and legislation to give bankruptcy judges the right to reduce the amount a debtor owes on his house.
On Wednesday, Gov. Arnold Schwarzenegger proposed a similar 90-day moratorium, plus a loan-modification program that would ensure that mortgage payments don’t consume more than 38 percent of homeowners’ incomes.
But the task of fixing the housing market is daunting. The Sacramento area has seen more than 30,000 foreclosures since the start of 2007, one of the worst foreclosure rates in the nation.
With the economy weakening, and an estimated $3 billion worth of so-called option-ARM mortgages expected to reset in the coming year in California, “there is a prospect of more foreclosures,” said Paul Leonard of the Center for Responsible Lending.
And the soaring federal budget deficit will likely put more upward pressure on mortgage rates, Krohn said. That will tend to depress home prices, he said.
