Summers Says U.S. Economy to Decline ‘For Some Time’

By Matthew Benjamin

April 26, 2009 (Bloomberg) -- The U.S. economy will continue to contract “for some time to come,” said Lawrence Summers, director of the White House National Economic Council. “I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said today on “Fox News Sunday.” The International Monetary Fund, which held meetings last week in Washington, cut its forecast for each of the Group of Seven economies for this year and next. The lender said the U.S. economy would shrink 2.8 percent this year and have no growth in 2010, with unemployment rising to 10.1 percent. Summers said the economy will pick up as manufacturers rebuild depleted inventories and consumers replace aging cars. “These imbalances can’t continue forever,” he said. “When they are repaired they will be a source of impetus for the economy.”
Texas Instruments Inc., the second-biggest U.S. chipmaker, said April 20 that customers have begun to increase orders after reducing inventories. Summers said the Obama administration is “on a path toward containment and toward building a path toward expansion,” he said, adding that “even sharp plans take time” to work, perhaps six months or more.

Stress Tests

Summers reiterated the administration’s assertion that “the vast majority of banks in the U.S. are well capitalized.” Regulators have conducted stress tests on the 19 largest banks to determine whether they need more capital and are discussing their findings with bank officials this week. “There’s work that needs to be done,” to fix the ailing financial industry, including raising capital and providing additional government money to banks “where necessary,” Summers said. “We’re going to be in a good position to provide the support and set the framework in which the banking system can move along the process of recovery,” Summers said. Results of the stress tests are due for publication on May 4. Valerie Jarrett, a senior adviser to President Barack Obama, said Americans shouldn’t “pre-judge the outcome” of the tests. “Whether management changes occur, whether banks are asked to raise more capital, all of that’s going to come forth in the coming week,” Jarrett said on CNN’s “State of the Union” program today.

Chrysler Deadline

Summers said he was hopeful that Chrysler LLC, facing an April 30 deadline from the Obama administration to come up with a viable reorganization plan or face bankruptcy, would succeed in negotiating an alliance with Italy’s Fiat SpA. “It’s in everybody’s interest, we believe, to see these negotiations succeed, and we’re hopeful that they will,” Summers said. “It’s obviously a situation that we’re monitoring carefully, but it’s a negotiation between Chrysler and its potential acquirer, Fiat. There are important issues with creditors, with a range of stakeholders.”
He wouldn’t rule out bankruptcy for Chrysler, saying such a move wouldn’t mean liquidation but instead a “change in legal form” for the automaker to allow it “to function more effectively.” “You can’t have a situation in which companies proceed on a permanent basis relying only on cash from the government,” Summers said. Summers said the White House is working with credit card companies toward “provisions that would protect consumers.” If legislation the administration supports is passed, “you’ll see benefits to consumers that would come very quickly.”

To contact the reporters on this story: Matthew Benjamin