During a meeting with congressional leaders on January 5, President-elect Obama reportedly agreed with the goal of passing an economic recovery package before Congress’ scheduled February break. Over the past several weeks members of the House and Senate had discussed having a package ready for signature soon after the President-elect takes office. The additional time will allow the House and Senate to introduce and consider their respective legislative proposals, including probable markups, in the committees of jurisdiction. Reports indicate that the House is likely to consider legislation first, followed by the Senate. The congressional calendar calls for the House and Senate to break the week of February 16. Additionally, Senate Majority Leader Harry Reid (D-NV) indicated on January 5 that President-elect Obama is being counseled by 20 economists who favor a recovery package in the area of $800 billion to $1.2 trillion. However, a Congressional Research Service report release on December 30 stated that the original proposal was likely to be between $670 billion and $770 billion with congressional add-ons raising the total figure to $850 billion.

Congressional leaders hinted earlier this week that infrastructure funding from the expected economic stimulus bill will most likely be allocated using the 2005 national highway law, Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users. The 2005 surface transportation law distributes federal money to the states using a complex formula that considers a state’s miles of highway, vehicle miles traveled, and number of registered vehicles. Using the formula would avoid earmarks, which is something that the incoming administration has stated numerous times that it wishes to avoid. Critics argue that if funding is tied to a formula, rather than states’ self-identified need, it may not channel money where it can be used fastest which is to create the most jobs, the primary objective of a stimulus. Funds could end up being used on lower productivity projects, rather than on those projects with the potential to make the greatest impact. However, given the urgency that congressional leaders and the incoming administration have said is needed with an economic stimulus, the funding formula offers the most practical method of allocating such large sums of money in a short amount of time.

On January 7, the Congressional Budget Office (CBO) released updated projections for the fiscal 2009 federal budget deficit showing that it may reach a total of $1.2 trillion. This figure does not include the current economic recovery package that is still being assembled, which could total anywhere from $700 billion to $1.2 trillion, adding a significant amount to the deficit. The previous nominal record for a budget deficit was $454.8 billion recorded in fiscal 2008 and the $1.2 trillion figure would represent a deficit of 8.3 percent of GDP which would be a post World War II record, exceeding the 6 percent level reached in 1983. The CBO report also predicted federal revenues would decline $166 billion, or 6.6 percent, from 2008. Additionally, the report stated that federal spending will rise as federal outlays for the Treasury Department’s financial industry bailout are expected to top $180 billion, the federal government’s takeover of Fannie Mae and Freddie Mac will cost $240 billion, and spending on unemployment and nutritional assistance will rise sharply. The report also anticipates that gross domestic product will dip 2.2 percent this year, unemployment will top 9 percent by early 2010, average home prices will decline another 14 percent through the second quarter of 2010 and consumption will decrease 1 percent in 2009, followed by modest growth in 2010.

Link: The Budget and Economic Outlook: Fiscal Years 2009 to 2019

House Financial Services Chairman Barney Frank (D-MA) stated on January 7 that he has been given every indication that President-elect Obama will seek the second half of the $700 billion Troubled Asset Relief Program (TARP) funds. Although President Bush can still formally request the money, Congress could choose not to act for 15 days, by which time President-elect Obama would be sworn in. Representative Frank has been tasked with developing legislation that will give greater oversight to how the second half of the funds are used, as there is considerable congressional anger over the way in which the funds from the first $350 billion were allocated by the Treasury Department. Representative Frank indicated that his legislation should be ready in a few weeks and hoped that congress would not have to vote on whether to release the funds before that time in order to ensure that the second $350 billion was more closely followed by Treasury.

Sales of automobiles declined significantly for the largest automakers in December, falling more than 35 percent compared to one year ago. The largest decline was seen by Chrysler, which saw its sales fall by 53 percent. Chrysler was followed by Toyota, Honda, Ford, General Motors, and Nissan, which saw declines of 37 percent, 32 percent, 31 percent, and 31 percent respectively. Overall, 2008 was one of the worst years for car sales since 1992. After factoring in the increase in population, similar rates of decline were last seen in 1960s. Smaller carmakers fared slightly better as Volkswagen saw a decline in sales of 14 percent while Mercedes said its sales fell 24 percent. Automobile sales make up a noticeable amount of tax revenues for some states, and the dramatic decline in sales numbers could further reduce state sales tax collections.

On January 2, the Institute for Supply Management (ISM) released December figures for its Manufacturing index, which posted a value of 32.4, down 3.8 percent from its November level. A reading below 50 indicates contraction and a reading above 50 indicates expansion. This was the fifth consecutive month that the index has been below 50. In December, all but one of the components of the index contracted at faster rates then they did in November, a sign that the manufacturing economy was weakening further. Exports, which had been growing in the middle of 2008, have now contracted for the past three months. Additionally, the manufacturing employment index reached its lowest level since 1982, posting a reading of 29.9 in December, down from 34.2 in November. ISM also released December figures for its non-manufacturing index on January 6, which showed that although the index rose 3.3 percent to a reading of 40.6, the industry was still contracting. Three of the four components of the index, business activity, new orders, and employment all contracted in December, but by slower rates than in November. The non-manufacturing employment index also increased to 34.7 up from 31.3 in November.

Link: Non-Manufacturing Index News Release, Manufacturing Index News Release