Dear friends,
Do check out this recommended article about the state of the US economy.
Stocks Are Hurt by Latest Fear: Declining Prices </NYT_HEADLINE><SCRIPT language=JavaScript type=text/JavaScript>function getSharePasskey() { return 'ex=1384923600&en=597aa81b0cb6f272&ei=5124';}</SCRIPT><SCRIPT language=JavaScript type=text/JavaScript>function getShareURL() { return encodeURIComponent('http://www.nytimes.com/2008/11/20/business/economy/20econ.html');}function getShareHeadline() { return encodeURIComponent('Stocks Are Hurt by Latest Fear: Declining Prices');}function getShareDescription() { return encodeURIComponent('The Dow fell below 8,000 as concern spread that the economy might be facing a chronic and debilitating decline in prices.');}function getShareKeywords() { return encodeURIComponent('Prices (Fares, Fees and Rates),Consumer Price Index,Stocks and Bonds');}function getShareSection() { return encodeURIComponent('business');}function getShareSectionDisplay() { return encodeURIComponent(' / ');}function getShareSubSection() { return encodeURIComponent('economy');}function getShareByline() { return encodeURIComponent('By VIKAS BAJAJ');}function getSharePubdate() { return encodeURIComponent('November 20, 2008');}</SCRIPT>
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</NYT_BYLINE>Published: November 19, 2008
<!--NYT_INLINE_IMAGE_POSITION1 --><NYT_TEXT>After gyrating wildly for weeks, the stock market lurched lower on Wednesday, falling to its lowest point in nearly six years, as concern spread that the economy might be facing a chronic and debilitating decline in prices.
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The New York Times
The New York Times
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Mark Lennihan/Associated Press
Construction on a 30-story condominium tower in the Williamsburg section of Brooklyn. Construction of new homes cooled last month, reaching the slowest pace on record.
The Dow Jones industrial average closed below 8,000 for the first time since early 2003 after new reports painted a grim picture of the economy and raised the specter of
deflation, which would put more strain on hard-pressed businesses and workers.
The Labor Department reported that prices of consumer goods and services fell by a record amount in October, while another report showed that a measure of home building fell for the fourth straight month, to its lowest level in the 49 years that the government has kept that data.
While most consumers might welcome the idea that things are getting cheaper, deflation is an economists’ nightmare. It was a hallmark of the Depression and Japan’s so-called lost decade in the 1990s. A big worry is that deflation would blunt the impact of interest rate cuts by the
Federal Reserve, forcing policy makers to use other tools to try to revive the economy.
The
Consumer Price Index, a measure of how much Americans pay for groceries, entertainment and other goods and services, fell by 1 percent in October, to an annualized rate of 3.7 percent, according to the Labor Department. It was the biggest one-month drop in the 61-year history of the index and the lowest annualized gain since October of last year.
Much of the decline could be traced to a 14 percent drop in the price of gasoline, but the cost of other goods — including clothes, milk and vegetables — also fell sharply.
The vice chairman of the Fed, Donald L. Kohn, said that the risk of deflation, defined as a “general decline in prices,” remained slight but had increased. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said in response to a question after a speech. The Fed, he added, would be aggressive, if necessary, to prevent a broad drop in prices.
Stocks started falling shortly after 10 a.m. and ground their way down for much of the day before tumbling sharply in the last hour of trading. The broad Standard & Poor’s 500-stock index closed down 6.1 percent, to 806.58, falling below a low it set on Oct. 27. The index is now only 37 points above its October 2002 low. The Dow dropped 427.47, or 5.1 percent, to 7,997.28.
Financial shares led the market down, with
Citigroup falling by more than 23 percent and
Bank of America closing down 14 percent.
General Motors and the
Ford Motor Company also tumbled as prospects for a federal aid packaged looked grim. “That spooked investors quite a bit,” said Sam Stovall, chief equity strategist at Standard & Poor’s Equity Research. “G.M. and Citigroup, two venerable companies, are right now on the ropes.”
In the credit market, the price of corporate debt and bonds backed by commercial mortgages plummeted, while government bonds rallied as investors sought safe havens. The yield on the 10-year Treasury, which moves in the opposite direction from its price, fell to 3.32 percent, from 3.53 on Tuesday.
Analysts say a sustained decline in consumer prices would be terrible for the economy. Businesses that cut prices to attract buyers are likely to have to lay off workers as well. They may also have little left over to pay lenders or shareholders.
Prices are falling outside the United States too. Consumer prices declined in Britain, France, Germany and elsewhere in Europe in October, and prices were flat in September in Japan, which has fought deflation on and off for nearly two decades.
The decline in consumer prices is all the more remarkable because this summer many economists were concerned about inflation and the prospect for stagflation, in which inflation and unemployment rise simultaneously, contrary to their usual relationship. “It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”
But that concern has been quickly dashed, in large part because of a steep drop in commodity prices. Crude oil prices, for instance, have fallen more than 63 percent from their July peak of $145.29 a barrel, to $53.62 on Wednesday. The national average price for unleaded gasoline is now $2.05 a gallon, down from $2.92 a month earlier, according to AAA, the auto club.
