It's official: Recession started last year

WASHINGTON -- The U.S. economy officially entered a recession one year ago, and new evidence that the downturn will be deep and prolonged sent the stock market plummeting Monday.

The Dow Jones industrial average dropped 7.7 percent, or 679.95 points. Part of the fall may have reflected profit-taking after last week's surge in stock prices, but it also came on bleak economic reports, including one that showed manufacturing activity in November was weaker than it had been since 1982. Investors plowed money into Treasury bonds, seen as safe havens in uncertain times.

In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research, the official arbiter of recessions, confirmed what many Americans already knew.

Private forecasters warned that this downturn is likely to set a post-World War II record for length and is likely to be more painful than any recession since 1980-81.

"We will rewrite the record book on length for this recession," predicted Allen Sinai, president of Decision Economics in Lexington, Mass. "It's still arguable whether it will set a new record on depth. I hope not, but we don't know."

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.

Bernanke said "economic activity appears to have downshifted further in the wake" of the deepening financial crisis in September, and "even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time."

Bernanke, speaking to business leaders in Austin, Texas, said it was "certainly feasible" to cut the Fed's benchmark overnight lending rate below its current 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks.

Because the Fed cannot lower rates below zero, Bernanke indicated he would continue trying to stimulate the economy through other means, particularly by expanding the bank's intervention in private markets. He said the Fed, for example, could buy long-term Treasury securities or debt issued by mortgage finance companies Fannie Mae and Freddie Mac.

Last week, the Fed announced it would spend $500 billion to buy mortgage securities backed by the two companies and $100 billion of their debt. Those moves already have helped lower mortgage rates, thus stimulating the economy.

Bernanke also said the Fed "can provide backstop liquidity not only to financial institutions, but directly to certain financial markets," referring to a recent program that was launched to support the commercial paper market.

The Fed is already, in effect, lending money directly to companies that fund their operations with commercial paper, a form of short-term debt. Last week, it announced a similar action to effectively lend money for credit cards, auto loans and other consumer debt.

Paulson, in a speech in Washington, vowed to look at new ways to use the $700 billion bailout fund that Congress approved in October.

In Congress, Democratic leaders are drawing up a huge new fiscal stimulus plan that could total more than $500 billion. Democrats said they plan to have the measure ready as soon as Congress convenes with a strengthened Democratic majority in January.

But many analysts said they see no signs yet that the economy is nearing a bottom. American consumers, who for decades have been the country's tireless source of growth when all else failed, have cut back on their spending more sharply than at any time since the early 1980s.

Consumer spending plunged in the third quarter of this year, and the evidence so far suggests they may pull back even more in the fourth quarter. Consumers account for about 71 percent of American economic activity, and their most recent retreat is occurring even though gasoline prices have dropped by almost half in the last month and left people with more money in their pockets.

In a separate report, construction spending in the United States fell 1.2 percent in October, the Commerce Department said, worse than expected.

The stock market spent the day absorbing a litany of bad news that convinced investors that the optimism that fed a 1,276-point gain over five sessions was premature.

Stocks first slid on initial reports that the first weekend of the holiday shopping season, while better than some retailers and analysts feared, saw only modest gains. That had Wall Street worried that the rest of the season would be disastrous, a troubling possibility not only for retailers but for an economy that is dependent on consumer spending for its growth.

Demand for U.S. Treasury bonds became so high that investors were willing to accept extraordinarily low interest rates.

The yield on a 10-year bond was 2.73 percent -- a record low -- meaning investors were willing to lend the U.S. government money at that rate for a decade.

Losses on equity markets spread to Asia, where Japan's benchmark Nikkei average fell more than 5 percent in early trading today.

This article was compiled from reports by the Washington Post and New York Times.