Dow Plunges 680 Points as Recession Is Declared

December 2, 2008
Dow Plunges 680 Points as Recession Is Declared

By MICHAEL M. GRYNBAUM
The evidence of a recession has been widespread for months: slower production, stagnant wages and hundreds of thousands of lost jobs.

But the nonpartisan National Bureau of Economic Research, charged with making the call for the history books, waited until now to make it official — and the announcement came on a day when the American stock market fell nearly 9 percent in a single session.

The sharp declines on Wall Street — the Dow Jones industrial average dropped 679.95 points or 7.7 percent — appeared more about profit-taking than the economy. Investors have long assumed that the country was in recession, and analysts said that after last week’s gains, including the biggest five-day rally in decades, a sell-off was to be expected.

Still, Monday’s losses were striking, and they reminded investors that nothing can be predicted in today’s environment. The major indexes fell by hundreds of points from the start, led by huge declines in shares of financial firms. Citigroup, Merrill Lynch and Morgan Stanley shares all dropped nearly 20 percent. Most other major Wall Street banks were also in double-digit percentage declines.

“Financials led the rally on the way up, and they’re leading on the way down,” said Anthony Conroy, head equity trader at BNY ConvergEx Group.

The broader Standard & Poor’s 500-stock index was down 8.9 percent, and the Nasdaq fell 8.95 percent.

The S.&P. and the Dow are back to their levels of last Monday, erasing nearly four days of gains.

Crude oil futures for January delivery settled Monday at $49.34 barrel, down $5.09. in New York trading.

Some hedge fund and mutual fund managers, anticipating big redemption requests from clients, may have seen last week’s rally as a good point to unload assets at a decent price. Other investors may have been spooked by a spate of poor economic news, including the worst reading on the health of the manufacturing industry since 1982.

Investors may also be playing defense ahead of Friday’s report on the job market, one of the most important indicators of the health of the economy. Analysts expect that employers shed more than 300,000 jobs in November, underscoring the problems facing American workers and businesses.

It is also somewhat remarkable that on one of the worst days in the history of the stock market, there was no panic to be seen on Wall Street. In six and a half hours, the S.&P. declined more than 8 percent — the type of collapse that historically has taken years to occur. But in the new Wall Street, the reaction was quiet.

“Investors have slowly become accustomed to it, after seeing it day after day for month after month,” said Todd Salamone, an analyst at Schaeffer’s Investment Research. “A year ago, an 8 percent move would have raised a lot more eyebrows than it does today.”

The difference, of course, is that the country entered a recession exactly one year ago, at least according to the Business Cycle Dating Committee, which is made up of seven prominent economists, most from the academic sector. The group made their official announcement on Monday that the economy entered a recession in December 2007.

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators,” the members said in a statement. “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

The committee noted that the contraction in the labor market began in the first month of 2008 and said that the declines in most major indicators, like personal income, manufacturing activity, retail sales, and industrial production, “met the standard for a recession.”

“Many of these indicators, including monthly data on the largest component of G.D.P., consumption, have declined sharply in recent months,” they wrote.

This is the first official recession since 2001, when the economy suffered after the bursting of the technology bubble. The period of expansion lasted 73 months, from November 2001 to December 2007.

The manufacturing industry suffered its worst month since 1982, according to a closely watched index published by the private Institution for Supply Management. The index fell to 36.2 in November from 38.9 in October, on a scale where readings below 50 indicate contraction.

That was the worst monthly reading since 1982, and a sign that the worldwide credit crisis was taking a serious toll on American businesses. New orders fell sharply, although export orders held steady from October.

“However you look at the numbers, the message is the same: manufacturing is in free fall, with output collapsing,” Ian Shepherdson of High Frequency Economics wrote in a note to clients. “We see no prospect for near-term improvement.”

A separate report from the Commerce Department showed that spending on construction projects fell 1.2 percent in October, after staying unchanged in September. Private construction dropped 2 percent with a sharp drop in the residential sector, offering few signs of relief from the housing slump.

The declines on Wall Street came after stocks in Europe and most of Asia moved lower, as investors refocused attention on a gloomy economic outlook.

Benchmark indexes in Paris and Frankfurt were down more than 4 percent, and London’s FTSE-100 dipped 3.6 percent. The declines were minor compared with the 13 percent increase that European stocks enjoyed last week.

“We’re giving back some of the appreciation in equities that we gained in the last few weeks,” said Robert Talbut, a fund manager at Royal London Asset Management.

“I think in terms of valuations there are some good deals starting to appear,” Mr. Talbut said. “But valuations are never enough in themselves.”

Any serious market recovery would require a determined response from global governments, he said, but investors have lots of questions about how the policy measures that have already been announced will work.

Investors were also troubled by mounting evidence that consumer spending in the United States would fall sharply this holiday shopping season, choking off one of the prime fuels of American economic growth. Retailers received more business than expected over the Thanksgiving shopping weekend, but the steep discounts they used to lure customers could undermine profits.

Black Friday sales were 3 percent higher than the year before, according to ShopperTrak, which tracks the industry.

Asian stocks ended mostly lower. The Tokyo benchmark Nikkei 225 stock average fell 1.4 percent, while the S.& P./ASX 200 in Sydney fell 1.6 percent.

The Kospi index in Seoul declined 1.6 percent. But the Hang Seng index in Hong Kong rose 1.6 percent, and the Shanghai Stock Exchange composite index rose 1.3 percent.

The yield on the two-year Treasury note, which moves in the opposite direction of the price, fell to a record just below 0.95 percent, while the yield on the 10-year note fell to 2.86 percent, the lowest on record.

David Jolly contributed reporting.