Eye on the Economy with Adam Perrotta

As the holidays approach, observers of the economy are likely in anything but a festive spirit. A rash of recent news has proven that the turmoil is far from over, and the situation may well become significantly worse before it gets better.

The auto industry’s requested bailout remains in limbo at the moment, with President Bush saying he might use funds from the Troubled Asset Relief Program to aid automakers in avoiding bankruptcy. Bush would not provide a timeline for such a plan, which would involve providing the Big Three auto companies with money from TARP, which was originally earmarked to prop up ailing Wall Street firms and banks when enacted in September. A proposed $14 billion loan for GM, Ford and Chrysler remained in a state of uncertainty after failing to clear the Senate last week. Bush said that while a failure of the Big Three “could be devastating for the economy,” he would not say for sure whether TARP funds would definitely be used, calling the option only “a possibility.”

Meanwhile, the housing market continues to struggle, and the latest sign of just how bad things have gotten came with the release of a report saying that American homeowners will lost a collective $2 trillion or more by the end of the year. The report, by real estate Website Zillow.com, claimed that home values dropped 8.4 percent year-over-year during the first three quarters of 2008, as compared to the same quarters in 2007. And some 11.7 million homeowners are now “underwater” on their mortgage, meaning that escalated interest rates and plummeting home values have conspired to make the total they owe on a home loan more than the home’s current worth.

Speaking of loans, the credit markets remain tight across all types of lending. Household debt actually fell in the third quarter, the first quarterly drop ever. According to a Federal Reserve report, household debt fell by 0.8 percent during the quarter, as cash strapped consumers are finding it harder to borrow and are pulling back on spending accordingly. Though such fiscal restraint may sound prudent, the decline in buying will likely be a further drag on the economy.

And in another sign of a lack of financial confidence, investors are pulling their money from mutual funds, withdrawing about $2.8 billion from equity based mutuals during the week ending December 10th. The previous week saw $12.1 billion drained from such funds, according to a report by TrimTabs Investment Research. The continued withdrawals indicate both that investors have lost confidence, and that many out of work investors have had to dip into their investments, neither of which is a positive sign.

Perhaps the new year will bring with it good financial tidings. But considering the scope of the current problems, better days are likely further away than the next turn of the calendar.