Stocks plunged at the steepest pace in more than two decades Wednesday after a report showed consumers cut their spending for the third consecutive month in September, a clear sign the USA is in recession.
The Dow Jones industrial average fell 733 points, or 7.9%, to 8578. Gloomy investors, shifting focus from the ongoing government financial rescue effort, grew dejected that the economy is in for a significant downturn and logged the biggest one-day percentage decline in the Dow since 1987.
Federal Reserve Chairman Ben Bernanke cautioned in a speech that even if markets stabilize, a "broader economic recovery will not happen right away." In a separate talk, Fed Vice Chairman Donald Kohn said it was most likely the economy would be "subpar well into next year" before improving in late 2009 and 2010.
Also, a report from the Fed out Wednesday painted a bleak picture of the economy, with job cuts, sales drops, depressed housing markets, factory slowdowns and tight credit from coast to coast.
Retail sales fell 1.2% in September from August, the Commerce Department said. It was the biggest drop in consumer spending, which accounts for more than two-thirds of U.S. economic activity, since August 2005.
Consumers in September cut their spending at car dealerships, restaurants and bars, and at stores selling groceries, clothing, furniture, electronics and appliances, building materials and gardening equipment, and sporting goods, books and music. Internet sales also fell.
"The consumer shut up shop even before the markets got crushed, and that is not good news for the economy," says Joel Naroff of Naroff Economic Advisors.
Bernanke, in his New York speech, did not indicate whether another interest rate cut is in the cards when policymakers meet Oct. 28-29. The Fed last week cut a key interest rate a half-percentage point to 1.5%, moving in concert with other central banks around the globe to stimulate economic growth.
Data out Wednesday pointed to an easing in inflation. The producer price index, a closely watched gauge of wholesale inflation, fell 0.4% in September following a 0.9% plunge in August. It was the first back-to-back monthly decline in the PPI in nearly two years, the Labor Department said.