The U.S. economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation’s business cycles.
In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones.
But private forecasters warned that this downturn is likely to set a new postwar record for length and is likely to be more painful than any recession since 1980 and 1981.
“We will rewrite the record book on length for this recession,” said 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.”
As if adding a grim punctuation mark to what could become the worst holiday shopping season in decades, the Dow Jones industrial average plunged nearly 680 points, or 7.7 percent, to 8,149. Part of the drop may have reflected profit-taking after last week’s surge in stock prices, but it also came in response to new data showing that manufacturing activity dropped to its lowest point in 26 years.
Both the chairman of the Federal Reserve, Ben S. Bernanke PhD ’79, and the Treasury secretary, Henry M. Paulson Jr., vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.
Bernanke, speaking to business leaders in Austin, Texas, said it was “certainly feasible” to reduce the Fed’s benchmark overnight lending rate below its current target of 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks.
And in an unusually explicit follow-up, Bernanke said the central bank was also prepared to use the “second arrow in our quiver” if policymakers have already reduced that rate, called the federal funds rate, to nearly zero.
Among the options, he said, the Fed can start aggressively buying up longer-term Treasury securities. That would have the effect of driving down longer-term interest rates. The Fed is already doing something of that sort, by buying up commercial debt from private companies as well as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Paulson, in a speech in Washington on Monday, 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. Meanwhile, Democrats could take up legislation next week that would provide financial assistance to the automobile industry.
President George W. Bush, increasingly the odd man out in the last weeks of his term, said his administration will do whatever necessary to safeguard the system.