Economic Signs Point to Longer, Deeper Recession

"It's similar to back in 2001, when the economy was declining for a while, but it was not until the 9/11 attacks that there was a freefall in activity," said Mark Vitner, a senior economist at Wachovia. "That caused a slowdown to become a recession. That's why the committee waits so long to make a call, so it has as much data as possible to work with."

The formal designation of a recession was not the only source of economic gloom yesterday. The Institute for Supply Management's survey showed that manufacturing activity was weaker in November than it had been since 1982, when the nation experienced its worst downturn since World War II. Similar surveys yesterday showed that the manufacturing slump has extended to Europe and China. In a separate report, construction spending in the United States fell 1.2 percent in October, the Commerce Department said, worse than expected.

On Wall Street, demand for U.S. Treasury bonds was so high that investors were willing to accept extraordinarily low interest rates. The yield on a 10-year bond was 2.73 percent -- a record low -- meaning investors were willing to lend the U.S. government money at that rate for a decade.

Losses on equity markets spread to Asia. Japan's benchmark Nikkei average fell more than 5 percent in early trading today.

Top economic policymakers said they would use all possible measures to combat the slump. Bernanke, speaking to the Greater Austin Chamber of Commerce, said it would be "feasible" for the Fed to continue cutting the short-term interest rate it controls but noted that it could not go much lower. The federal funds rate stands at 1 percent, and analysts widely expect it to be cut at the Fed's policymaking meeting in two weeks.

Because the Fed cannot lower rates below zero, Bernanke indicated that he would continue trying to stimulate the economy through other means -- particularly by expanding the bank's intervention in private markets. He said the Fed, for example, could buy long-term Treasury securities or debt issued by the mortgage-finance companies Fannie Mae and Freddie Mac.

Last week, the Fed announced that it would deploy $500 billion to buy mortgage securities backed by the two companies and $100 billion of their debt. Those moves have already helped lower mortgage rates, thus stimulating the economy.

Bernanke also said that the Fed "can provide backstop liquidity not only to financial institutions, but directly to certain financial markets," referring to a recent program that was launched to support the commercial-paper market.

The Fed is already, in effect, lending money directly to companies that fund their operations with commercial paper, a form of short-term debt. Last week, it announced a similar action to effectively lend money for credit cards, auto loans and other consumer debt.

"He's confirming what they've already been doing," said Harris, the Barclays economist, "which is a dramatic expansion of their balance sheet, and creating direct lending programs that circumvent the banking system."

Although Bernanke left the door open to further expansions of direct Fed lending, he also signaled that the central bank would be aggressive in removing such programs to prevent inflation. "To avoid inflation in the long run and allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will have to be brought back to a more sustainable level," he said.

Fed policymakers will ensure that this is done in a timely way, he said. "However," he added, "that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

In Washington, Paulson indicated that there could be new programs before he leaves office in seven weeks.

"We are actively engaged in developing additional programs to strengthen our financial system so that lending flows into our economy," the Treasury secretary said in a speech to the Fortune 500 Forum. "When these programs are ready for implementation, we will discuss them with the Congress and the next administration.