News

As the U.S. Congress pushes ahead with another stimulus package, two sobering government reports paint a picture of an economy that still faces huge hurdles - absorbing losses in commercial real estate, and creating jobs.

Half of the roughly $1.4-trillion (U.S.) worth of commercial loans coming due over the next four years are already "under water" and could trigger bank losses reaching as much as $300-billion per year, according to a Congressional oversight panel report released yesterday. A loan is considered underwater when a borrower owes more than the underlying property is worth.

The panel, headed by Elizabeth Warren, said it is "deeply concerned" that faltering loans on malls, condos and office buildings could cause hundreds of small and mid-sized banks to fail, dragging down the broader economy.

"A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American," the 189-page report concluded.

"In the worst case scenario, hundreds more community and mid-sized banks could face insolvency ... Their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession."

Also yesterday, President Barack Obama's top economic advisers warned that unemployment will hover around 10 per cent through this year and not recede to the pre-recession level of 6 per cent until 2015.

The White House Council of Economic Advisers, chaired by Christina Romer, said it expects the economy to generate a net average of 95,000 jobs per month in 2010. The economy lost 20,000 jobs in January and 8.4-million jobs since the recession began at the end of 2007.

Unless the rate of job creation predicted by the White House picks up beyond 2010, it would take more than seven years to replace all those lost jobs.

The jobs picture is unlikely to get a boost from the commercial real estate sector.

Property values have tumbled more than 40 per cent since 2007, rents are way down and acres of space sits vacant, including 18 per cent of office space and eight per cent of multifamily-housing units.

The Congressional oversight panel urged bank regulators and lenders to come clean and address the threats facing commercial real estate "forthrightly and transparently," short of another bailout. Loans to the commercial real estate sector total more than $3.4-trillion.

"There is a commercial real estate crisis on the horizon," the report said.

The reports on real estate and jobs coincide with the release of an $85-billion stimulus plan by Senate Democrats that includes extended jobless benefits, tax breaks and more money for infrastructure projects. The Democrat-held House passed a $155-billion in December, which comes on the heels of last year's $787-billion stimulus bill.

To pass a final bill, the Senate and House must now reconcile their differing versions.

Ms. Romer said the dismal conditions inherited by the Obama administration mean the recovery will be long and hard.

"I think there's just no way to understate how huge the economic challenges facing the country have been this past year," said Ms. Romer, currently on leave from her job as a University of California-Berkeley economics professor.

"So everything obviously from the financial crisis, the terrible recession, but the longer-run problems - the stagnating middle-class incomes, soaring health care costs, the failure to invest in education, innovation, clean energy - we certainly inherited an economy with a number of economic problems."

The 462-page annual report also forecasts that Americans will save at a much higher rate than they have in recent memory, slowing the pace of recovery.

In a statement accompanying the report, Mr. Obama said both the government and individuals are facing budget pressures that will make it particularly challenging to rebuild the economy.

"For growth to be truly sustainable - for our prosperity to be truly shared and our living standards to actually rise - we need to move beyond an economy that is fuelled by budget deficits and consumer demand," Mr. Obama said. "We need to export more and borrow less from around the world, and we need to save more money and take on less debt here at home."

*****

Looking for growth

95,000

Number of net jobs per month the U.S. economy is expected to create in 2010

20,000

Number of U.S. jobs that were lost in January

7

Number of years it is estimated to take to replace all the U.S. jobs lost since the recession began