Federal Reserve Chairman Ben Bernanke urged Congress to immediately pass a “critically important” package of aid for U.S. workers facing a possible recession, and President Bush told congressional leaders he agrees quick action is necessary.
Downgrades of key bond-insurance companies added to the market’s black mood, with investors fearing an escalation of months of credit-market problems.
The Dow lost nearly 2.5 percent, giving the index its worst three-day percentage decline since October 2002. The Standard & Poor’s 500, closely watched by market professionals, fell nearly 3 percent Thursday. The Dow, S&P 500 and Nasdaq composite index have now given back all of the gains they achieved in 2007.
Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The latest number came in well short of the negative 1.5 that had been forecast and was the weakest since October 2001.
“The Philadelphia Fed just announced dreadful numbers,” said John O’Donoghue, co-head of equities at Cowen & Co. “It’s not rocket science — the economy is slowing dramatically, and it’s being reflected in economic reports.”
Similarly, the steep slump in housing intensified at the end of last year, pushing home construction down by the biggest amount in nearly three decades.
The Commerce Department reported that construction began on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second-biggest annual decline on record, exceeded only by a 26 percent plunge in 1980.
The year ended on a weak note, with construction dropping by 14.2 percent in December and applications for new building permits falling for a seventh consecutive month.
Economists said the current housing slump has already surpassed the 1990 downturn and will likely rival, if not surpass, the prolonged housing downturn in the late 1970s and early 1980s, when the Fed was pushing interest rates to the highest levels since the Civil War.
Mark Zandi, chief economist at Moody’s Economy , forecasts that median home-resale prices will fall by 2.5 percent for all of 2007, which would be the first annual price decline on records that go back four decades.
“I think this housing downturn will be unprecedented in terms of its breadth across the country and in its severity,” Zandi said. “I don’t think we have seen anything like this, certainly since the Great Depression.”
Various recent reports have increased recession worries and spurred Bush and members of Congress into talks about economic stimulus.
Bernanke would not say specifically what initiatives he would like to see in the package. But he appeared to dismiss Republican arguments that permanently extending Bush’s income-tax cuts would reverse the economic downturn.
The Bush administration is close to completing a proposal that will include $800 rebates for individuals and $1,600 for households as well as tax breaks for businesses, people familiar with the plan said.
Bush will lay out the “principles” of the economic package today, though it’s “too early” to unveil a final proposal, according to his spokesman, who declined to provide details. Congressional leaders say a stimulus package may be as much as $150 billion.
Credit concerns also dogged Wall Street after rating agency Moody’s Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed investors because it would place all bonds insured by Ambac on review as well. Wall Street is concerned that bond insurers would be unable to absorb a spike in claims.
The Dow, which had been up more than 50 points early in the session, closed down 306.95, or 2.46 percent, at 12,159.21. The Dow is off 8.33 percent for the year and had its lowest close since it ended the March 16 session at 12,110.41.
Broader market indicators also plummeted. The S&P 500 index lost 39.95, or 2.91 percent, closing at 1,333.25 and leaving it at a year-to- date loss of 9.2 percent, while the Nasdaq dropped 47.69, or 1.99 percent, to 2,346.90, giving it a 2008 deficit of 11.51 percent.
Thursday brought the lowest close for the S&P 500 since October 2006 and the worst for the Nasdaq since last March.
The Russell 2000 index of smaller companies fell 19.34, or 2.76 percent, to 680.57. The index is down more than 20 percent from its 2007 high, passing the rule of thumb designating a bear market.
Bond prices rose as stocks fell and anxious investors sought the safety of government-issued securities. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.63 percent from 3.68 percent late Wednesday.
The dollar was mixed against other major currencies.
