WASHINGTON — U.S. Federal Reserve Chairman Ben Bernanke on Monday signaled that officials will hold nothing back in their support of financial markets and the economy, calling further interest rate cuts from already low levels “certainly feasible.”

In prepared remarks to an economic conference in Texas, Bernanke also said the Fed’s powers don’t end with the federal funds rate, and its ability to inject liquidity into markets through its balance sheet “remains effective.”

While officials will at some point need to bring short-term interest rates and liquidity back to more sustainable levels, “that is an issue for the future,” Bernanke said in the text of his remarks to the conference in Austin, Texas.

“For now, the goal of policy must be to support financial markets and the economy,” Bernanke said.

Among the Fed’s options, Bernanke said, are direct purchases of Treasurys and securities issued by government-sponsored enterprises “in substantial quantities” to affect yields, “thus helping to spur aggregate demand.”

He cited the Fed’s announcement last week that it will buy up to $600 billion in GSE debt and GSE-backed mortgage securities and called it “encouraging” that the announcement of that measure has brought mortgage rates down.

The Fed can also channel liquidity to certain segments of the financial markets, Bernanke said, citing the Fed’s recent measures to support the commercial paper market.

Bernanke said the U.S. economy “remains under considerable stress” and that after contracting 0.5% at an annual rate in the third quarter, “economic activity appears to have downshifted” after September.

Reflecting that assessment, the Institute for Supply Management’s November manufacturing index, released Monday, fell to its lowest level since 1982. Meanwhile, construction spending posted a steeper-than-expected drop in October, according to government figures. The November employment report, due for release Friday, is expected to show a plunge in nonfarm payrolls in excess of 300,000 with a further increase in the unemployment rate.

Indeed, Bernanke said weekly jobless claims figures “suggest that labor market conditions worsened further in November.” And with labor and credit conditions worsening, consumer spending is “on a pace to post another sharp decline in the fourth quarter,” he said.

The National Bureau of Economic Research, an academic group that determines when recessions occur based on a series of indicators, on Monday officially declared that the U.S. is in fact in a recession that began last December.

To prevent a deeper and prolonged recession, Fed officials are expected to lower interest rates at their Dec. 15-16 policy meeting, a view supported by Bernanke’s remarks Monday.

The target federal funds rate already sits at just 1%, matching lows last seen in 2003 and 2004. Further cuts would put the funds rate at levels not seen in a half-century.

Yet, even if the fed funds rate approaches zero — as a growing chorus of Wall Street economists expect — the Fed still has considerable sway over markets and the economy through its balance sheet.

“Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” Bernanke said.

That firepower was evidenced last week by the Fed’s decision to provide a loan backstop for the government’s bailout of Citigroup Inc. (C) and purchase GSE and GSE-backed mortgage securities.

Bernanke pledged that the Fed and other financial market regulators “will carefully monitor the conditions of all key financial institutions and stand ready to act as needed to preserve their viability in this difficult financial environment.”

However, he cautioned that government officials will have to at some point make dealing with the too-big-to-fail issue “a top priority.”

Bernanke was upbeat on the outlook for inflation, saying that with commodity prices down “dramatically,” inflation “appears set to decline significantly over the next year toward levels consistent with price stability.”

By Brian Blackstone
Of DOW JONES NEWSWIRES

NEW YORK — The U.S. economy has been in recession for about a year, according to the research organization that tracks economic cycles.

In a statement, the National Bureau of Economic Research said its Business Cycle Dating Committee determined that the U.S. entered recession in December 2007, marking the end of the economic expansion that began in November 2001. That month marked the end of the last recession for the U.S. economy.

“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,” according to the NBER’s statement.

The committee uses Gross Domestic Product reports and Gross Domestic Income estimates as a guide. Domestic production and employment are the primary conceptual measures of economic activity, according to the statement.

The determination was made on Friday and released to the public Monday. The NBER noted it has tweaked cycle dates in the past, although no changes have occurred since 1978.

By Rob Curran
Of DOW JONES NEWSWIRES

WASHINGTON — The U.S. economy was a little softer during the third quarter than first believed, according to government data Tuesday showing weaker consumer spending and overseas sales.

Gross domestic product dropped at a seasonally adjusted 0.5% annual rate July through September, the Commerce Department said in a new, revised estimate of third-quarter GDP. It was the weakest performance since a 1.4% decrease in third-quarter 2001 GDP.

Originally, the government had estimated third-quarter 2008 GDP fell 0.3%. Second-quarter 2008 GDP climbed 2.8%.

Corporate profits kept retreating in the third quarter. Profits after taxes fell by 3.0% to $1.302 trillion, after sliding 0.4% in the second quarter and 7.7% during the first quarter. Year over year, profits were down 9.9%.

Price inflation gauges were lowered in the government’s revisions to the economic data.

GDP is a measure of all goods and services produced in the economy. Wall Street expected a slightly bigger adjustment; economists surveyed by Dow Jones Newswires had called for a 0.6% decrease in revised third-quarter GDP.

The data revisions showed third-quarter spending by consumers dropped 3.7%. That was down from a previously reported 3.1% decrease; it was also below the second quarter’s 1.2% increase. Consumer spending accounts for about 70% of economic activity. The 3.7% decrease took 2.69 percentage points from GDP in the third quarter; the original estimate was a reduction of 2.25 percentage points.

Purchases of durable goods tumbled 15.2% in July through September, below the previously reported 14.1% drop and below the decrease of 2.8% in the second quarter. Durable goods are expensive items designed to last at least three years, such as cars.

Third-quarter non-durables spending fell by 6.9%. Services spending was flat.

Trade gave less to the economy than first estimated. Imports dropped 3.2% instead of the originally reported 1.9% decrease. Exports were revised down, rising 3.4% instead of rising 5.9%. Trade boosted GDP by 1.07 percentage points in the third quarter. Originally, trade was seen contributing 1.13 percentage points to GDP.

Businesses decreased spending more than previously thought. Outlays fell by 1.5% July through September, which was bigger than the originally estimated 1.0% decrease. Business spending rose 2.5% in the second quarter. Third-quarter investment in structures increased 6.6%; equipment and software fell 5.7%.

Residential fixed investment, which includes spending on housing, plunged by 17.6% in the third quarter, a tumble less than the originally estimated 19.1% plunge. Second-quarter spending fell by 13.3%.

The report showed businesses lowered inventories in the third quarter, a drop of $29.1 billion. Originally, Commerce estimated a $38.5 billion decrease. Companies had liquidated stocks by $50.6 billion in the second quarter. The smaller drawdown of goods in the third quarter elevated GDP during that period by 0.89 percentage point. In its original report on third-quarter GDP, Commerce said inventories added 0.56 percentage point to GDP.

Real final sales of domestic product, which is GDP less the change in private inventories, declined 1.4%, revised down from an earlier estimated 0.8% decrease. Second-quarter sales rose 4.4%.

Federal government spending increased by 13.6%, revised down from an initially estimated 13.8% increase. Second-quarter spending climbed 6.6%. State and local government outlays rose 0.8%.

As for inflation gauges within the report, the government’s price index for personal consumption increased 5.2%, below the previously estimated 5.4% increase but above the second quarter’s 4.3% increase. The PCE price gauge excluding food and energy climbed 2.6%, below the previously estimated 2.9% increase but higher than the second quarter’s 2.2% increase.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.7%, below the previously estimated 4.8% climb but above the second quarter’s 4.2% increase.

The chain-weighted GDP rose an unrevised 4.2%; it had gone up 1.1% during the second quarter.

By Jeff Bater
Of DOW JONES NEWSWIRES

President-elect Barack Obama said Monday the U.S. must act “swiftly and boldly” to confront an economic crisis of “historic proportions,” pressing lawmakers to quickly pass a stimulus package big enough to “jolt” the economy back to life.

Speaking at a press conference in Chicago, Obama unveiled the team that will lead his administration’s response to the slumping economy and battered financial markets, confirming that Federal Reserve Bank of New York President Tim Geithner will be nominated to replace Henry Paulson at the Treasury Department.

But the president-elect didn’t detail how large his stimulus proposal would be and shed no light on whether he would repeal the Bush administration’s tax cuts or let them expire in 2011.

“I want to see it enacted right away,” Obama said of the stimulus. “It is going to be of a size and scope that is necessary to get this economy back on track.”

In addition to Geithner, Obama said former U.S. Treasury Secretary Larry Summers will head his National Economic Council, while economist Christina Romer will lead the Council of Economic Advisors and Melody Barnes will be director of the Domestic Policy Council.

That team will begin working immediately on proposals to create or save 2.5 million jobs, prevent foreclosures and help the ailing U.S. auto sector, Obama said.

“With our economy in distress, we cannot hesitate or delay,” he said. “The economy is likely to get worse before it gets better. Full recovery won’t happen immediately.”

He said the stimulus package needs to deal with the immediate crisis and lay the foundation for longer-term growth by investing in clean energy, health care and education.

“It’s going to be costly,” Obama said, acknowledging that the federal deficit next year will be “bigger than we’ve seen in a very long time.”

The Bush White House has resisted Democrats’ stimulus proposals, dooming the prospects for legislation before Obama takes office in January.

“The next administration has a lot of decisions to make,” White House spokesman Tony Fratto said. “They have policies that they are looking at. But what we’re focused on right now are implementing the authorities that we have to support the economy in the best way possible.”

Obama said the government needs to use the new authorities granted to the Treasury “forcefully in the coming weeks,” adding that he will decide whether additional funds need to be drawn down under the Troubled Asset Relief Program as he gets information from Paulson and Federal Reserve Chairman Ben Bernanke.

An Obama administration would honor all commitments the Bush White House has made in addressing the crisis, he said, hours after the government announced its rescue of Citigroup Inc. (C), a decision Obama and Bush discussed earlier Monday.

“These extraordinary stresses on our financial system require extraordinary policy responses,” Obama said.

Under a plan unveiled late Sunday, the government will insure part of Citigroup’s balance sheet, putting taxpayers at risk if the bank’s portfolio of mortgages and other assets continues to suffer. The plan reflects the government’s concern over the state of Citigroup, whose stock plunged sharply last week, threatening confidence in the broader financial system.

Obama said he’s not ready to say whether the crisis would prompt him to let tax cuts for wealthy Americans expire on schedule rather than be repealed.

“If we’re going to help pay for some of these expenditures that are absolutely necessary to get our economy back on track, that those who are in a position to pay a little bit more do so,” he said. “Whether that’s done through repeal or whether that’s done because the Bush tax cuts are not renewed is something that my economic team will be providing me a recommendation on.”

On the automakers, Obama repeated that the Big Three shouldn’t be allowed to disappear, but also shouldn’t be given a blank check. He expressed disappointment in last week’s congressional testimony by executives from General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC.

“I was surprised that they did not have a better-thought-out proposal when they arrived in Congress,” Obama said. “I think Congress did the right thing, which is to say, “You guys need to come up with a plan and come back before you’re getting any taxpayer money.’”

Though the composition of Obama’s economic team had been widely reported, the president-elect made his first public remarks on the group, which features names well known to investors. Obama said the team will bring solid judgment and experience and shares his “fundamental belief that we cannot have a thriving Wall Street without a thriving Main Street.”

Paulson had kind words for the man who will succeed him if confirmed, as is widely anticipated, by the Senate. “I have the highest regard for Tim,” Paulson said. “I have great confidence in his understanding of markets, his judgment and leadership, and his ability to meet the challenges that lie ahead.”

Obama’s selection of Geithner and Summers also won plaudits from Sen. Judd Gregg, R-N.H., the top Republican on the Senate Budget Committee.

“With this new and strong team coming in at the side of President-elect Obama, we can be quite confident that efforts to rebuild the financial structure of the country, which is a cornerstone of the economy, will continue in a coordinated and effective way,” Gregg said in a statement. “This announcement is good news for Main Street and is a very positive first step by our incoming President.”

Big business applauded Obama’s personnel choices as well.

“This team brings a wealth of knowledge to Washington and an understanding that any sustainable economic recovery will involve the business sector,” U.S. Chamber of Commerce President Thomas Donohue said in a statement.

By Henry J. Pulizzi
Of DOW JONES NEWSWIRES

America is rediscovering its puritanical roots.

The Consumer Price Index’s 1% drop in a single month grabs headlines, but nine-tenths of that relates to falling food and energy prices. More worrying is the 0.1% drop in the core index, with shopaholic fixes like clothing, hotel stays and vehicles all falling. Airline fares decreased by 4.8%, despite large cuts to capacity.

For now, annual inflation, while down sharply from September’s 4.9%, is still positive at 3.7%. Energy and food will continue to have a big impact. Adjusting their respective weights in the basket for price moves this year, a return of these key items back to October 2007 levels would take another 1.8% off.

The risk of wider deflation is now unmistakable. The American consumer — roughly 70% of the domestic economy — is switching away from asset-fueled sprees to living on regular income. Consumer borrowing is down 1.5% year-on-year, a pace of decline last seen in the early 1990s recession.

The big question is how quickly shoppers can be lured back to the malls. So far, rapid monetary easing hasn’t worked. Neither the tax rebates sent out earlier this year nor the implied stimulus of lower gasoline prices — worth an annualized $283 billion based on the decline since July’s peak — has had a radical effect.

David Rosenberg, Merrill Lynch’s North American economist, reckons annual CPI could hit 0% within a year, as commodity prices fall, but also as rising unemployment erodes spending power further. Official lending rates, already near zero, will likely fall further. But with the consumer recession still in its infancy, the case for a big expansion in fiscal-stimulus programs is strengthening by the day.
By Liam Denning
OF THE WALL STREET JOURNAL

WASHINGTON — Given new expectations that the U.S. economy could contract for as much as a year, Federal Reserve officials stand ready to slash interest rates to levels not seen in half a century, minutes of their most recent policy meeting show.

Meanwhile, officials suggested that the economy could be in for a rather lengthy recession and sharplydowngraded their economic forecasts. The minutes, which were released Wednesday with the customary three-week lag, show that officials generally expect the economy to contract in the second half of 2008 and the first half of 2009. And some officials expect that the economic weakness “could persist for some time.”

Some officials voiced concern that future cuts might do little to put the ailing economy on a healthier path, according to the minutes. And with the target federal funds rate already at 1%, some officials pointed out that the Fed has “limited room” to lower further and should therefore move slowly. Still, others said more aggressive easing could help reduce borrowing costs as well as the odds of a deflationary outcome.

Either way, the Fed has made it clear that it is “unequivocally biased” to further rate cuts, wrote UniCredit Markets and Investment Banking economist Harm Bandholz in a research note.

“The minutes show that not even this historically low level has to be the end of the Fed’s easing cycle,” said Bandholz, adding that he expects the Fed to cut its target rate another 50 basis points at officials’ Dec. 16 meeting.

In their Oct. 28-29 meeting, officials said that “unfolding economic developments” could require the Federal Open Market Committee “to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities.”

Fed officials said they anticipate that economic data would show “significant weakness in economic activity” and that additional policy easing could well be necessary, according to the meeting minutes.

Meanwhile, they said they expect inflation to diminish in coming quarters.

“In any event, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy,” the minutes said.

Overall, officials found that risks to the economy had greatly escalated and the credit crisis had morphed into an “international phenomenon,” leaving them little choice but to cut interest rates to four-year lows.

As the credit crisis worsened last month, the FOMC voted unanimously Oct. 29 to lower the target federal-funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest level since the period between June 2003 and June 2004. The decision came in wake of Lehman Brothers Holdings Inc.’s (LEHMQ) September collapse, the near-failure of insurer American International Group Inc. (AIG) and new concerns about the conditions of other financial firms.

The Fed officials agreed that “significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures,” the minutes said.

They also noted that the credit crisis expanded globally since their September policy meeting, at which they held rates steady.

“The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period,” the minutes said. “This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on Oct. 8.” That day, Fed officials agreed to an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England.

Meanwhile, the Fed downgraded its 2008 forecasts for gross domestic product and the unemployment rate, according to a quarterly forecast the Fed released Wednesday.

The central tendency of officials’ forecast is for gross domestic product growth this year to stand between 0.0% and 0.3%, which is lower than its June projection of a 1.0% to 1.6% range.

Meanwhile, they slashed their GDP growth projection for 2009 to a range of -0.2% to 1.1%. In June, they had seen a 2.0% to 2.8% range for 2009.

Officials also raised their forecasts for the unemployment rate. They now see the unemployment rate between 6.3% and 6.5% in 2008, up from the previous forecast of 5.5% to 5.7%, the Fed said.

Amid a deteriorating economy, the unemployment rate had already surpassed the Fed’s previous forecast. Earlier this month, the Labor Department reported that the unemployment rate in October soared 0.4 percentage point to 6.5%, the highest level since March 1994.

By Maya Jackson Randall
Of DOW JONES NEWSWIRES

WASHINGTON — The retreating economy chased U.S. consumer prices down by the most in 61 years during October, sending home construction to an all-time low.

The consumer price index dropped 1.0% on a seasonally-adjusted basis compared to the previous month, the Labor Department said Wednesday. The core CPI, which excludes food and energy costs, fell 0.1%.

A separate Commerce Department report showed housing starts fell a fourth straight time, down 4.5% to a seasonally-adjusted 791,000 annual rate, a record low.

“It’s consistent with sharper deterioration in economic activity,” said Scott Brown, chief economist at Raymond James.

The 1.0% drop in consumer prices was the largest since February, 1947. Energy prices plunged 8.6% — a drop much greater than the 1.9% fall in September, when hurricanes in the Gulf of Mexico interfered with energy production and slowed the decline in energy prices. Gasoline prices in October plummeted 14.2%.

Food prices climbed 0.3% last month. Transportation prices decreased 5.4% on the month as airline fares dropped 4.8% and new vehicle prices fell by 0.5%. Housing, which accounts for 40% of the CPI index, was unchanged.

Medical care prices increased 0.2%, while clothing prices fell 1.0% compared to September.

“This report clearly reflects the crunch in discretionary consumers” spending, which is likely to persist for the foreseeable future,” said Ian Shepherdson, an analyst at High Frequency Economics.

Consumer spending, once a big engine for the economy, started a dive last summer. The economy in the third quarter declined, falling 0.3%, and the experts contend it has kept shrinking during the current, fourth quarter, which started Oct. 1. The first reading on gross domestic product, the government’s broad measure of the economy, won’t be available until late January.

The declining inflation numbers give the Federal Reserve room to chop interest rates again and give the economy another kick. Late last month, the Fed slashed the fed funds rate by another 0.50 percentage point to 1%.

The housing slump has gotten some blame for the economy’s downturn. Commerce data show that, year over year, housing starts last month were 38.0% below the level of construction in October, 2007.

It appears that the slide in construction will continue.

Building permits, a sign of future construction, declined 12.0% in October to a 708,000 annual rate in October, the Commerce Department data on starts showed.

“This report is a shocker,” IHS Global Insight economist Patrick Newport said.

Builders have been cutting back because sales and prices of new homes keep falling. The latest government report on new-home sales in the U.S. showed demand in September was 33.1% below the year-earlier level. The median price was down 9% over those 12 months. Inventories of unsold homes are high. The economy’s slump is sending the unemployment rate higher. Meek consumers awash in debt don’t want too spend, and on top of all that, securing financing is harder these days.

Starts of single-family homes decreased by 3.3% in October to 531,000. Construction of housing with two or more units fell 6.8% to 260,000.

“With sales very slow, and with the recent credit market dislocations and tighter lending standards, single-family housing starts will probably drop somewhat further,” Insight Economics analyst Steven Wood said. “Housing’s contribution to economic growth will be significantly negative again in (the fourth quarter). The silver lining is that with housing starts now off more than 65% from their peak, housing construction should be pretty close to a bottom.”

By Jeff Bater
Of DOW JONES NEWSWIRES

WASHINGTON — Treasury Secretary Henry Paulson offered a sobering view of the nation’s economy on Tuesday, saying it is “unrealistic” to expect the $700 billion Wall Street rescue plan to reverse the economic woes inflicted by the financial crisis.

“It is not a panacea for all our economic difficulties,” said Paulson in prepared remarks before the House Financial Services Committee.

Appearing alongside Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair, Paulson said that the passage of the rescue plan in October had allowed the federal government to take “decisive action” to prevent further shocks to the financial system. But, he acknowledged, “more needs to be done.”

“The rescue package was not intended to be an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilizing the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis,” he said.

The three officials were appearing before congressional lawmakers who are increasingly restive over Treasury’s implementation of the rescue plan. Just last week, Paulson announced that Treasury would not purchase troubled assets from financial institutions — as the rescue plan originally envisioned — and would instead focus on injecting capital directly into banks.

Treasury has marked $250 billion of the initial $350 billion it was authorized by Congress to use to make such capital injections. Paulson said in his testimony that emphasizing strong capital is the best strategy as the Troubled Asset Relief Program, or TARP, moves forward.

“More capital enables banks to take losses as they write down or sell troubled assets,” Paulson said. “And stronger capitalization is also essential to increasing lending which, although difficulty to achieve during times like this, is essential to economic recovery.”

In an a preemptive attempt to address a frequent criticism from lawmakers — that banks are hoarding the billions of dollars of federal funds they are receiving — Paulson said “it will take a while to get lending going.” Still, he said economic recovery will occur much sooner now than if the TARP was never passed by Congress.

“It will take a while to get lending going and repair our financial system, which is essential to an economic recovery,” Paulson said.

He also declined to move toward a compromise with lawmakers on having Treasury do more to help prevent the record numbers of foreclosures that are at the epicenter of the current financial crisis. He said existing programs through the administration and by private firms are enough and that “the most important thing we can do to mitigate the housing correction and reduce the number of foreclosures is to increase access to lower cost mortgage lending.”

By Michael R. Crittenden
Of DOW JONES NEWSWIRES

WASHINGTON — U.S. Federal Reserve Chairman Ben Bernanke on Tuesday defended the Treasury Department’s $700 billion financial market rescue program, saying its “existence” has helped to stabilize strained credit markets.

In prepared testimony to the House Financial Services Committee, Bernanke also said that while there has been some improvement in the functioning of credit markets, conditions “are still far from normal.”

The Troubled Asset Relief Program, or TARP, was originally supposed to purchase toxic mortgage-linked assets from banks. The aim, which Bernanke and Treasury Secretary Henry Paulson told lawmakers in September was critical to restoring order in markets, was to provide a mechanism to achieve price discovery in those frozen markets and jump-start lending.

But last week, Treasury said TARP would no longer include that centerpiece auction process to buy mortgage debt and would instead be used to inject capital into banks and boost consumer credit. Lawmakers have since criticized Treasury’s implementation of the TARP program.

But Bernanke told lawmakers Tuesday said that “the existence of the TARP allowed the Treasury to react quickly by announcing a plan to inject $250 billion in capital into U.S. financial institutions.”

Combined with steps the Fed and Federal Deposit Insurance Corporation have taken, “these actions, together with similar measures in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms,” Bernanke said.

Under the TARP legislation, Treasury had immediate access to $350 billion and would have to ask Congress for the second tranche. In a Wall Street Journal interview Monday, Paulson said Treasury is unlikely to tap the second $350 billion tranche at this time, giving the incoming administration the flexibility to decide how best to use those funds.

Going forward, Treasury’s ability to use TARP for capital injections and other steps to stabilize markets, “including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution,” will be key to restoring confidence, Bernanke said.

Bernanke also said there are “some signs that credit markets, while still quite strained, are improving.”

Overall credit conditions, he warned, “are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October.”

“There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks,” he said.

Meanwhile, a Fed program aimed at supporting money market mutual funds should be operational next week, Bernanke said.

The program, called the Money Market Investor Funding Facility, will finance purchases of commercial paper from money market funds.

By Brian Blackstone
Of DOW JONES NEWSWIRES

 NEW YORK — The U.S. economy is in the midst of the worst part of the recession, but growth may return by the second half of next year, according to economists in the latest Wall Street Journal forecasting survey.

“The intensity of decline will wane,” said Stephen Stanley of RBS Greenwich Capital. “We’ve cut out a lot of the low-hanging fruit, and it gets progressively tougher to see such rapid rates of decline.”

On average the 54 economists surveyed expect gross domestic product to decline 3% at an annualized rate in this year’s fourth quarter. That comes after the Commerce Department reported a 0.3% drop in the third quarter. Another negative reading is forecast for the first three months of next year with an essentially flat reading for the second quarter. Slow growth is seen for the second half of 2009, reaching 2.1% by the fourth quarter.

“By the third quarter of next year a recovery will be under way,” said John Lonski of Moody’s Investors Service, but he added that expansion won’t return to pre-crisis levels until 2010.

A number of economists surveyed gave a much more pessimistic forecast, due in part to pressure on consumers. “We’re not only in an economic downturn, but a serious banking crisis. The idea that you can just have a couple of quarters of negative growth and then we’re off to the races is just too optimistic,” said Paul Ashworth of Capital Economics, who is predicting GDP contractions throughout next year.

Government action is one reason why some economists see the landscape eventually improving. Nearly two-thirds of respondents say the Treasury Department’s Troubled Asset Relief Program, which has taken stakes in major financial institutions, is helping markets.

“The cost of doing nothing is greater than the cost of doing something, as we saw in the case of Lehman,” said Diane Swonk of Mesirow Financial, referring to the collapse of Lehman Brothers Holdings Inc. in September. “The idea is still to save the core ideas of a market-based economy, even if that means using government as a bridge to get there.”

Economists were supportive of more government stimulus. More than 80% favor a stimulus package in January, even if one is passed before the end of 2008. Some 34% of respondents said the top priority in such a package should be permanent tax cuts. On average, economists said the total size of government stimulus this year and early next should be more than $250 billion.

“By the second half of next year the impact of measures to stimulate the economy should become evident,” Lonski said.

Economists saw other factors boosting the chances of recovery. “Stimulus will help, but it won’t get us out of the problem. It’s tantamount to taking aspirin, as it will only temporarily ease pain,” said California State University’s Sung Won Sohn, who cited rebuilding confidence as essential for recovery.

President-elect Barack Obama “needs to extend unemployment, work to stem foreclosures and use other plans to demonstrate that he’s doing something. To stabilize confidence, you need programs to ease pain. People see that they can count on you, and confidence recovers,” he said.

Confidence is in short supply these days. In October, the Conference Board’s measure of consumer confidence posted the lowest reading since the survey began in 1967. Consumer spending also has suffered, recording a 0.3% decline in September.

Mounting job losses have exacerbated the consumer downturn, and even though economists are forecasting some improvement by late next year, the picture for the labor market remains grim. On average, respondents expect the unemployment rate to rise to 7.7% by December 2009, up from 6.5% last month, while they see the economy shedding more than 100,000 jobs a month over the next year.

If the economists’ average forecast were to materialize, the depth of the downturn would be about on par with the 1990 recession, but it wouldn’t reach the low levels seen in the early 1980s or 1970s.

“We’re at the very beginning of this process of unwinding a credit bubble and an asset-price bubble that took place over decades. It got out of control in the last five years, but it didn’t appear in the last five years,” said Joshua Shapiro of MFR Inc., who also is forecasting a shrinking economy through all of 2009. “People think in terms of a calendar as opposed to economic fundamentals. The cycle doesn’t know from the calendar.”

By Phil Izzo
Of THE WALL STREET JOURNAL

European central banks cut their key interest rates sharply, and Democrats readied a plan to inject $60 billion to $100 billion into the sagging U.S. economy, as leading industrialized nations tried anew to stave off a global downturn now predicted to be the worst since the end of World War II.

The Bank of England surprised markets by lowering its key lending rate by one and a half percentage points, to a 54-year low of 3% from 4.5%, in its biggest cut since 1992. The European Central Bank cut its key rate for countries that share the euro currency by a half percentage point, to a two-year low of 3.25%, while Switzerland’s central bank also cut its main target rate by a half-point in an unusual between-meetings move. In Seoul early Friday, the Bank of Korea lowered its main interest rate for the third time in a month.

The International Monetary Fund urged nations to go further by turning to fiscal measures, such as boosting spending and cutting taxes, to prevent a world-wide tailspin in economic growth. The IMF put out a new global forecast Thursday predicting that the economies of the world’s “advanced economies’ — 31 nations including the U.S., Western Europe and Japan — would contract by a combined 0.3% in 2009. That would be the first year those economies shrank as a group since the IMF was founded in 1945.

In the U.S., President-elect Barack Obama was to huddle with his economic advisers Friday. House Speaker Nancy Pelosi sketched out a two-pronged stimulus strategy in an interview Thursday with The Wall Street Journal. She plans to push Congress to approve a program worth $60 billion to $100 billion this month, followed by another that could include tax cuts after Mr. Obama is inaugurated in January. He had promised a new stimulus package during the campaign.

Meanwhile, gloomy economic news continued. In the U.S., retailers Abercrombie & Fitch and the Gap reported double-digit sales declines last month in stores open for at least a year. Discount giant Costco saw sales drop by 1%, the first decline since Thomson Reuters began collecting data in 1997. On Friday, the government will announce the unemployment rate for October, which Goldman Sachs estimates will jump to 6.4% from 6.1%.

In Europe, weaker foreign demand helped push manufacturing orders in Germany, Europe’s largest economy, down by 8% in September from August, the steepest slide since records began in 1991. Britain’s biggest mortgage lender said house prices fell by a record 14.9% in October compared with last year, the biggest fall since records began in 1983.

Recession weighed on the minds of investors world-wide, who dragged down markets despite the dramatic rate moves. Many worried central banks could quickly run out of ammunition to prop up struggling economies.

The European interest-rate cuts didn’t do much to help stocks. The pan-European Dow Jones Stoxx 600 Index lost 5.6%, to 215.47. The U.K.’s FTSE 100 Index fell 5.7% to 4272.41. In the U.S., the Dow Jones Industrial Average sank 4.85%.

The IMF estimated that global growth would advance just 2.2% next year — well below the line that the IMF traditionally considers a recession. At different times, the IMF has defined a recession as 2.5% or 3% global growth, but the fund’s chief economist, Olivier Blanchard, wouldn’t dub the current downturn a recession. He didn’t explain his reasoning, but the IMF, which represents 185 nations, tries to avoid what could be seen as politically charged pronouncements.

Former IMF chief economist Michael Mussa, now an economist at the Peterson Institute for International Economics, a Washington, D.C., think tank, wasn’t as constrained. “Growth as sluggish as they’re projecting should be defined as recession,” he said. In IMF data going back to 1970, global economic growth hasn’t fallen below zero; its low was 0.9% in 1982.

Thus far, aggressive loosening of monetary policy around the globe has done little to ease market concerns or buoy growth. Partly that may be a matter of timing. Interest-rate reductions can take between six to 18 months before they have a measurable effect on economic activity, economists estimate.

But monetary policy also may be insufficient to tackle today’s global credit crunch, in which financial institutions are wary of lending. The aversion of borrowers and lenders to taking risks can swamp the stimulative effect of interest-rate cuts, which are meant to reduce borrowing costs for banks and businesses.

ECB President Jean-Claude Trichet on Thursday urged commercial banks to lend to one another more freely. “I would ask the banks to be up to their responsibilities to fully take into account what we and governments have decided,” he said.

Until fairly recently, few central banks outside the U.S. were cutting rates. Between August 2007 and September 2008, the Fed pushed interest rates down by more than three percentage points. Interest rates outside the U.S. during that time actually increased by a little less than a quarter percentage point, according to a J.P. Morgan Chase & Co. tally of central banks in 30 large countries.

The shift in the past few weeks has been stark. J.P. Morgan estimates that globally, rates went down by more than half a percentage point in October alone. The latest moves by the U.K., ECB and others add to that. More easing looks certain.

It’s far from clear how many nations will try to match interest-rate cuts with the fiscal boost the IMF recommends. The IMF said such moves have been “limited.”

The U.S. pushed through a $168 billion stimulus package earlier this year, equal to about 1% of gross domestic product. That boosted consumer spending in the spring, but may not have done much longer-term good. Now some economists are arguing that Democrats’ new plan may be insufficient too.

Peter Hooper, chief economist at Deutsche Bank Securities, is suggesting spending equal to about 3% of GDP, or roughly $450 billion, over the next year — and an additional fiscal stimulus in 2010 worth 2% of GDP.

Federal Reserve Chairman Ben Bernanke last month endorsed a new stimulus package and said its size “should be significant.” He said any fiscal stimulus package should be designed to support the economy quickly, but avoided suggesting specific components.

European fiscal stimulus efforts so far have been uneven. Germany’s cabinet on Wednesday, for instance, approved a stimulus package including tax breaks and state-backed loans totaling around 23 billion euros (around $30 billion). But Germany’s finance minister rejected appeals for more income-tax relief, saying households would probably save the money gained by such a measure instead of spending it.

France has proposed only limited steps to stimulate its economy, including buying up 30,000 half-built homes in 2009 to help property developers. On Thursday, the government also said it would forge ahead with a different kind of plan: A wealth fund aimed at protecting national companies against foreign predators, starting with a 110 million euro investment to acquire a one-third interest in Chantiers de l’Atlantique, the shipyard that made the cruise ship Queen Mary 2.

ECB President Trichet on Thursday reiterated his standard refrain that euro-zone governments should stick to strict rules stipulating governments keep deficits below 3% of GDP, with limited wiggle room during economic downturns. Asked about the prospects for governments to spur growth more with fiscal stimulus, Mr. Trichet said, “You don’t change the rules.”

Despite the IMF’s advice, Japan’s experience with fiscal stimulus tends to spur caution among other nations. Tokyo poured money into public-works projects to pull Japan’s economy out of a 15-year downturn, but it didn’t accomplish as much as hoped and left the country with little-used bridges and other infrastructure. Now, the Japanese government, again facing likely recession, is rolling out a $51 billion package focused on payouts to families and businesses.

Opponents of fiscal stimulus say the additional money often doesn’t affect the economy quickly enough and winds up adding to long-term debt. In the U.S., only a fraction of consumers spent rebate checks from the first stimulus package this spring immediately.

The new stimulus plan Democrats are considering would instead focus on benefiting cash-strapped local governments and the unemployed. Officials are identifying unfunded public-works projects across the country that they say are essential infrastructure investments that could provide employment if they were jump-started with new spending.

Bob Davis, Jon Hilsenrath, Kelly Evans and Greg Hitt contributed to this article