Economy Top Priority As Downturn is Set to Worsen

A plunge in Wall Street stocks provided a sharp reminder of the scale of the financial challenges facing Barack Obama as gloomy economic data fueled fresh fears of a deep, prolonged US recession.

Obama owes a large slice of his electoral success to the global financial crisis. Exit polls found that 62% of voters put the economy as their number one issue - and that 85% of Americans termed themselves "worried" about the economy's direction.

Yesterday, amid the celebrations, the Dow Jones industrial average fell more than 300 points during morning trading to dip below 9,300, giving up ground made on Tuesday in the index's biggest election day gain since 1984.

Monthly employment figures showed that 157,000 jobs disappeared during October as service sector activity contracted sharply. The numbers reinforced the bleak outlook soon to be inherited by Obama, who faces plummeting house prices, seesawing stocks, failing banks and a crisis-stricken US motor industry.

His first act will be to select a treasury secretary who will be responsible for spending a $700bn banking bail-out fund and will need to be a credible name. Candidates include the Clinton-era treasury secretary Lawrence Summers and the former Federal Reserve chairman Paul Volcker, a close economic adviser to Obama who is possibly too old at 81. A third widely tipped candidate is Timothy Geithner, president of the Fed's New York branch, who has won plaudits for his cool-headed involvement in supporting teetering Wall Street institutions.

Even before his inauguration, Obama will be pivotal in negotiating a stimulus package to kickstart economic activity. The House speaker, Nancy Pelosi, wants a $100bn program that would include money for states to create employment by building new transport links, schools and public facilities.

It could involve food stamps for the poor, relief for people struggling with mortgages and, possibly, a round of tax rebate checks.

Dean Maki, an economist at Barclays Capital in New York, said the US economy was expected to contract by 2.5% in the final quarter of the year: "Given the majorities the Democrats have in both houses, it might be easier to agree on a stimulus bill. It could be passed before Obama even takes office, but he will have a role in shaping the legislation."

Next on the list of reforms will be regulation. The US treasury has spent $250bn buying stakes to part-nationalize struggling banks. But critics say few strings have been attached to these handouts.

In a speech earlier this year, the president-elect declared that "old rules" and "old institutions" needed reform to fit the changing shape of the financial system: "Our free market was never meant to be a free license to take whatever you can get, however you can get it."

A potential trip-up lies in Detroit, the down-at-heel motor city. The city's three major car-makers - General Motors, Ford and Chrysler - are losing billions of dollars every month. GM could run out of money next year unless Americans start buying cars again. The industry is pleading for a bail-out. The new president will need to show some tough love.

Key to Obama's economic platform is a tax cut to ease the fiscal pain suffered by working-class families. Obama has pledged relief of around $500 a person, which, his campaign says, will completely eliminate income tax for 10 million Americans.

Obama's spending plans are due to be financed through a tax rise for those earning more than $250,000 and through a windfall tax on energy companies.

In all that he does, Obama will need to be diplomatic. In an economic environment of extreme twitchiness, the new president's intentions will be scrutinized as never before.