U.S. Markets Dive on Deepening Recession Fears
By Jennifer Yousfi
Managing Editor
Money Morning
Weak U.S. retail sales sent domestic markets plunging yesterday (Wednesday), as worries about a deepening recession intensified.
All three major U.S. indices ended the day with heavy losses. At the New York close, the blue-chip Dow Jones Industrial Average Index had posted a steep decline of 733.08 points (-7.87%), to close at 8,577.91. The tech-laden Nasdaq Composite Index dropped 150.68 points (-8.47%), to reach 1,628.33. And the broader Standard & Poor’s 500 Index lost 90.17 points (-9.03%), to settle at 907.84.
All sectors were down with the consumer basic materials sector (-14.05%) and the energy sector (-14.48%) posting the largest declines.
“I don’t think things can get much worse,” Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts, told Bloomberg News. “September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.”
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Retail sales in September declined 1.2%. It was the largest one-month slide in three years and worst than median economist expectation of a 0.7% decline. The drop in consumer spending came before the heavy stock market losses of October.
“The consumer shut up shop even before the markets got crushed and that is not good news for the economy,” Joel Naroff, president and chief economist of Naroff Economic Advisors, said in a research note yesterday.
With consumer spending responsible for the bulk of U.S. gross domestic product (GDP), the unexpected decline in retail sales in the last month of the third quarter strengthens the possibility that GDP declined in the third quarter as well, signaling the U.S. economy contracted.
In a separate report, the government announced yesterday that the Producer Price Index (PPI) fell 0.4%. PPI measures the wholesale prices manufacturers pay for materials to produce finished goods.
“Price pressures will likely start easing going forward as the full extent of the slowdown hits home,” said Naroff.
With inflation on the wane and the risk to economic growth heightened, the U.S. Federal Reserve could have leeway for further easing at the next meeting of its monetary-policy-setting Federal Open Market Committee, slated for Oct. 28 – 29.
"The question on everyone’s minds is how deep of a recession (will there be)," Kathy Lien, director of currency research at GFT Forex in New York, told Reuters.
"Today’s (retail sales) number indicates a very strong chance of negative GDP growth for the third quarter and would certainly pave the way for another 25 to 50 basis points of easing (of monetary policy) over the next few months, and the PPI number confirms that as inflation is coming down as well," Lien said.
News and Related Story Links:
- Bloomberg News:
U.S. Economy: Retail Sales Slide Signals Deepening Recession
- CNNMoney.com:
Worst retail sales in three years
- BusinessWeek:
Stocks Plunge on Gloomy Data
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