Fears of Recession Deepen Rout

Credit markets provided modest good news, however, as the interest rates dropped on commercial paper, a form of debt that companies use to finance short-term cash flow. The Federal Reserve announced a new program to take on that debt Tuesday morning.

Some of the worst damage was sustained by U.S. automakers. J.D. Power and Associates said that the global auto industry may experience an "outright collapse" in 2009. Then the S&P Ratings Agency put General Motors debt on a credit watch. GM stock fell 31 percent, to $4.76, its lowest level since 1950, and Ford stock was down 22 percent.

Investors have become frustrated that the government's efforts to tackle the financial crisis, including plans to buy up billions in toxic mortgage debt and a global interest rate cut, have yet to loosen the credit markets.

"Everyone applauds [the government efforts]. The fearful part is that nothing has taken hold," said Bart Barnett, head of equity trading at Morgan Keegan, based in Memphis. "None of it seems to stop the free fall in the market."

The problem seems to be that many of the government actions, such as a the $700 billion U.S. financial system bailout passed a week ago, take time to go into effect.

"These programs take weeks if not months to implement, and the market is responding within minutes," said Diane Swonk, chief economist at Mesirow Financial.

Meanwhile, darker clouds have moved to new parts of the economy. Trouble in sectors like steel production and heavy machinery, which until recently were growing strongly, has contributed to the mounting view that the U.S. economy has tumbled into a significant recession.

Economists now widely predict that the economy will contract until the middle of 2009. If that holds true, it would mark the nation's longest period of economic decline since the downturn that ended in 1975.

"Some time ago we expected a more mild downturn, but this is a pretty serious recession," said Abiel Reinhart, an economist with J.P. Morgan Chase.

The nation is still absorbing steep declines in home construction, an industry that shed 35,000 jobs in August alone. Sales of clothing and shoes are down, as is spending on recreational outlets -- including casino trips, nightclubs and sporting events -- according to Commerce Department data.

Factory orders were down in August by 3.5 percent, a decline that included products such as computers, pharmaceuticals and iron and steel. Demand for steel is dropping as the global economy cools and the domestic market for cars and appliances shrinks.

"The market was booming from early this year until July," said Christopher Plummer, managing director of Metal Strategies, a consulting firm. "Now we are looking at one of the worst situations the industry has faced in some time."

There is a bright spot for American consumers: Oil prices also continued a steep two-month decline yesterday, falling $2.36 to $86.59 a barrel as traders bet that the slowing global economy will reduce demand for energy worldwide. That should eventually flow through to American consumers' gasoline bills and could boost consumer spending.

But even that was bad news for the stock market, as energy shares fell. Exxon Mobil dropped 11.7 percent, and Chevron fell 12.5 percent.

As the damage spread, financial stocks continued to take a beating. Citigroup and Wells Fargo, which have been fighting for control of Wachovia, were down 10 and 17 percent respectively. Citigroup walked away from the Wachovia deal yesterday, but said it would pursue a lawsuit against Wells Fargo's bid.

Morgan Stanley continued to suffer from concerns that Mitsubishi UFJ Financial Group may abandon plans for a $9 billion investment in the firm and fell 26 percent. Morgan Stanley had said closure of the deal was imminent.

"You're looking at an entire sector that will be associated with volatility for a continued period of time," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "They are trading, not investing. They are looking to make quick investments. They are not investing for a two- to three-year period. They are investing for a two- or three-hour period."

The drop in financial shares also follows the end of a three-week Securities and Exchange Commission ban on short-selling in that sector. A short sale is a bet that a stock will fall, and some corporate executives have blamed the practice for depressing their stocks. "I would image that's adding a little bit to the volume," Cardillo said.

IBM said that profit grew 20 percent, to $2.8 billion, during its third quarter and that it expects its results to hold up despite the financial crisis. After showing gains most of the day, IBM's stock closed down 1.7 percent, or $1.55 a share, falling to $89.

"Everybody knows when we start to see third-quarter earnings, it's not going to be a pretty sight," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. He said today's earnings report from industrial stalwart General Electric is "the ultimate bellwether."

The Federal Reserve's announcement that American International Group would need an additional $37.8 billion loan on top of the $85 billion it received last month weighed down that sector. AIG was down 25 percent, while competitor Prudential Financial was down 23 percent.

Staff writer Dan Eggen and correspondent Blaine Harden in Seoul contributed to this report.