Economy unsettled but Bush upbeat
His reassurances didn't jibe with indicators: Slow growth, rising prices, and stalled retail sales.
WASHINGTON - President Bush sought to calm fears in financial markets yesterday, but his effort was virtually swept aside by a sobering assessment from Federal Reserve Chairman Ben S. Bernanke, a jump in the prices manufacturers pay for raw materials, and other unsettling portents.
The stock market tumbled again. The dollar dropped. And some key members of Congress indicated they would try to slow down approval of the plan to bolster mortgage giants Fannie Mae and Freddie Mac. Even a substantial drop in oil prices was seen as a sign of declining confidence the U.S. economy.
Bush spoke out on the economy for the first time since investors accelerated their selloff of Fannie Mae and Freddie Mac shares last week. He acknowledged that "we're going through a tough time," but insisted that Americans "can have confidence in the long-term foundation of our economy."
"We will come through this challenge stronger than ever before," the president declared at a White House news conference. "Our economy has continued growing, consumers are spending, businesses are investing, exports continue increasing, and American productivity remains strong."
But the upbeat tone of Bush's remarks was strikingly at odds with the picture Bernanke painted in his semiannual appearance before the Senate Banking Committee. The economy is caught between weak growth and strengthening inflation, he said, and the combination will present a stern challenge for policy-makers in the months ahead.
"The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation," Bernanke said.
Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox also spoke out during the day, seeking to quell the economic anxiety that has gripped Wall Street and the country. But reassuring language out of Washington appeared to have little effect.
The Dow Jones industrial average sank more than 225 points in the morning as traders were spooked by Bernanke's downbeat tone. The market recovered in midday when oil prices dropped, but skidded again in the afternoon.
In dollar terms, crude oil recorded its biggest drop since 1991 amid fear that the weakening economy will cause demand to fall precipitously. Prices slumped almost 5 percent, dropping $6.44 to $138.74 a barrel. But analysts drew scant comfort from the decline, convinced that it was stimulated by declining confidence in the U.S. economic outlook.
That assessment was reinforced when the dollar briefly fell to a new low against the euro.
The latest report on producer prices - what manufacturers and other producers pay for the materials they buy - showed inflationary pressures continuing to build.
Wholesale prices rose a larger-than-expected 1.8 percent in June, the sixth consecutive jump. The increase was propelled largely by higher fuel prices. Wholesale inflation has swelled 9.2 percent over the last year, the largest 12-month increase since 1981.
Retail sales inched up a less-than-expected, 0.1 percent in June as car sales fell. The lackluster sales gain stoked fear that the consumer spending surge that was created by the government's economic-stimulus program is petering out. Yesterday, Democrats controlling Congress proposed another such package.
"We will be proceeding with another stimulus package," House Speaker Nancy Pelosi (D., Calif.) said after meeting with several economists. But Bush cautioned in his news conference that lawmakers should "wait for the stimulus package to fully kick in" before passing another.
Shares of the battered mortgage-finance companies resumed their slides, with Fannie Mae dropping 27 percent and Freddie Mac slumping 26 percent.
Key members of Congress signaled that they are unlikely to quickly rubber-stamp the Treasury Department's proposal to rescue Fannie and Freddie by temporarily extending an unlimited line of credit and permitting the government to buy stock in the quasi-public quasi-private companies.
"I think we all certainly appreciate the spirit in which the Fed, the SEC and Treasury Department have acted," said Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee. "But we do them and the American people a disservice if we do not examine very carefully the proposals that are being put forward."
"The best we can say [is] this is Paulson going out there and doing what he thinks is right in the short term," said Rep. Scott Garrett (R., N.J.). "But we have to do what we think is right in the long term."