Worries spread; global markets sink

Wall Street may get a reprieve Thursday after a crucial barometer of inflation came in flat last month.

Dow futures pointed to a higher opening, lifted by a government report that consumer prices, which have marched higher for most of the year, were flat in September and dropped in August.

The better-than-expected data came too late to save overseas markets, though. They slumped on rising fears that the global economy is sinking into a deep recession.

Thursday's data may not completely alleviate that anxiety. The prices people pay for gas, food, clothes, medicine and other essentials still have risen at an annualized pace of 4.5 percent, faster than the 4.1 percent increase for all of 2007.

And the U.S. economy is already suffering from other woes: falling wages, weak consumer spending, tight credit, slumping home prices and rising job losses.

Even good news on the economy contains worrisome kernels. The number of new people signing up for unemployment benefits last week dropped, but new claims still totaled 461,000 - a figure associated with deep troubles in employment conditions.

"Given the likely drawn-out nature of the prospective adjustments in housing and financial markets, I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010," Donald Kohn, vice chairman of the Federal Reserve, concluded Wednesday evening.

Worries about the economy sent the Dow Jones industrials down a staggering 733 points Wednesday.

The selling spree carried over to Asia, where stocks fell sharply Thursday. Japan's key stock index plummeted more than 11 percent, South Korean shares shed 9.25 percent, and Hong Kong's Hang Seng Index was down 4.8 percent.

Following Asia's lead, benchmarks in Britain, Germany and France slipped about 3 percent. Russia's RTS also fell.

The plunge in stocks put the nation's economic anxiety front-and-center as the two major presidential candidates, Sens. Barack Obama and John McCain, squared off in their final debate Wednesday night in Hempstead, N.Y.

McCain used the debate to accuse Obama of waging class warfare by advocating tax increases designed to "spread the wealth around." The Democrat denied it, and countered that he favors tax reductions for 95 percent of Americans.

Wednesday's daylong stock market sell-off came as retailers reported the biggest drop in sales in three years, while a Federal Reserve snapshot showed Americans are spending less and manufacturing is slowing around the country.

Piling up losses in a rough final hour of trading, the Dow ended the day down nearly 8 percent - its steepest drop since one week after Black Monday in 1987. The Dow has wiped out all but about 127 points of its record-shattering 936-point gain on Monday of this week.

Earlier this week, after governments around the world announced plans to use trillions of dollars to prop up banks, including a U.S. plan to buy about $250 billion in bank stocks, the market appeared to be turning around - or at least calming down.

Instead, relentless selling gave the Dow its 20th triple-digit swing in the past 23 trading sessions, an unprecedented run of volatility. The Dow has finished higher on only one day this month. The loss of 733 points is the second-worst ever for the average, topped only by a 778-point decline Sept. 29.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have expressed confidence that the government's radical efforts to stabilize the financial system and induce banks to lend again will eventually help the economy.

But Bernanke warned that even if financial markets calm, the nation will not snap back to economic health quickly.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke told the Economic Club of New York on Wednesday. He left the door open to further interest rate reductions.

President Bush plans to speak on the financial crisis early Friday - before the markets open - at the U.S. Chamber of Commerce headquarters across from the White House. Officials said the speech wasn't intended to put forward new policy actions, but rather would give the nation a more detailed explanation of what the government is doing to combat the crisis.

Some analysts believe the economy jolted into reverse in the recently ended third quarter, while others predict it will shrink later this year or early next. The classic definition of a recession is back-to-back quarters of shrinking economic activity.

Two gloomy economic reports on Wednesday showed the debate at this point is merely semantic.

The Fed's snapshot of business conditions around the nation, known as the Beige Book, showed economic activity weakening across all 12 of the Fed's regional districts. Consumer spending - which accounts for more than two-thirds of economic activity - slumped in most Fed regions. Manufacturing also slowed in most areas.

As shoppers cut back, retail sales dropped sharply in September. The 1.2 percent decline was the biggest in three years. Leaders of the world's top economic powers, the Group of Eight, said they would meet "in the near future" for a global summit to tackle the financial crisis. The group comprises the United States, Japan, Germany, France, Britain, Italy, Canada and Russia.

British Prime Minister Gordon Brown said the meeting could be held next month. He said the discussions should include not only the world's richest nations but also major emerging economies such as China and India.

The current financial crisis began more than a year ago in the United States when lax lending standards on certain home mortgages came home to roost. Foreclosures skyrocketed, mortgage securities soured and financial companies racked up huge losses.

(Copyright 2008 by The Associated Press. All Rights Reserved.)

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