A growing fear of economic deflation helped take the air out of the stock market Wednesday, and another white-knuckle final hour on Wall Street pushed the Dow Jones industrials under 8,000 to their lowest close since the financial meltdown began.
Consumer prices in October took their biggest monthly plunge in the six decades that records have been kept — a reprieve for shoppers but a danger sign for the economy because falling prices can make a mild recession spiral into something worse.
The drop illustrated once again how quickly the economic danger can shift in tumultuous times like these. The inflation fears that gripped the nation just a few months ago now seem like a distant memory.
"Consumer price inflation has suddenly screeched into reverse," said Brian Bethune, economist at IHS Global Insight. "The inflation threat has disappeared from the radar screen."
Worried about the economic data, a gloomy outlook from the Federal Reserve and the fate of the Big Three automakers, investors yanked money out of the stock market. The Dow drifted lower for most of the day, then plummeted in a tumultuous final hour of trading.
It crossed under 8,000 in the last minutes before the closing bell and closed down 427 points, or about 5 percent, at 7,997 — its lowest close since March 2003. The average has dipped below 8,000 on other days since the meltdown began in mid-September but had not closed there.
The Standard & Poor's 500, a broader snapshot of the stock market, slipped more than 6 percent. The financial crisis has already wiped out $6.7 trillion of value from the S&P 500 since its October 2007 high. In the same period, the Dow has lost more than 6,000 points.
"I don't know what the catalyst is going to be where we turn the corner and people start buying stocks wholeheartedly again," said Jon Biele, head of capital markets at Cowen & Co. "People got out of the way. The financial situation hasn't changed."
The Federal Reserve sharply lowered its economic projections and signaled that further interest-rate cuts might be necessary to ease the economy's worst crisis since the Great Depression.
Documents from the Fed's most recent closed-door deliberations on interest rate policy showed a worry about "significant weakness" in the economy and a worsening job market.
After those deliberations, on Oct. 29, the Fed lowered the benchmark interest rate to 1 percent, a level seen once before in the past half-century. Many economists think the Fed will go even lower when it meets again Dec. 16.
At the same time, though, the documents showed the Fed was worried about the effectiveness of previous rate cuts and had doubts about whether more cuts would help much.
Falling prices might sound like a gift at first. But a prolonged, widespread decline would do serious economic damage, dragging down incomes, clobbering home prices even more and shrinking corporate profits.
The consumer price index, the country's most closely watched inflation barometer, dropped 1 percent in October, the biggest monthly decline since the government started keeping records in 1947. Many analysts expect another drop for November.
That's a stunning reversal from as recently as June, when consumer prices spiked 1.1 percent, the second-fastest pace in a quarter-century. Galloping prices for gasoline, food and other items were socking people's wallets and touched off widespread fears about inflation.
Worries ran so high then that the Federal Reserve in late June halted its rate-cutting campaign to shore up the ailing economy. Fed Chairman Ben Bernanke and his colleagues fretted that lowering rates further would worsen inflation.
The Fed stayed on the sidelines until Oct. 8, when it joined other major central banks and slashed interest rates in a global effort to limit the damage from the staggering financial system.
Even with October's price reprieve, Americans are in no mood for a shopping spree. They have cut back sharply on spending amid mounting strains from job losses, shrinking nest eggs and falling home prices.
The consumer pullback helped jolted the economy into reverse in the third quarter. More economic contraction in this quarter would meet the classic definition of a recession — two straight quarters of negative growth.
And falling prices might not help even on the shopping side.
"Consumers would wait to buy because they would keep waiting for prices to go lower," said Rebecca Braeu, economist at John Hancock Financial Services. "That would curtail consumer spending."
Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems. America's last serious case of deflation was during the Depression in the 1930s. Most economists think the chances are slim that the country will tip into such a spiral, but they aren't ruling it out.
"I am worried that the situation in the United States could turn into a deflationary period in this country if trends continue," said Sung Won Sohn, chief economist at the Martin Smith School of Business at California State University. "With economic conditions getting worse and not better, the risk of deflation is there."
Other analysts said deflation was a remote threat.
Another report Wednesday showed that the housing market remains in a deep funk. Builders slashed home construction by 4.5 percent last month, driving it down to the lowest level on records dating to 1959.
The government announced more borrowers can qualify for a new $300 billion program that lets troubled homeowners swap risky loans for more affordable ones. The program, called Hope for Homeowners, had just 111 applications in October, its first month.
Meanwhile, leaders of the nation's struggling auto companies returned to Capitol Hill to plead for financial aid. Top Senate Democrats suggested a bill to rescue Detroit's Big Three was stalled, and they challenged the Bush administration to act to save the industry if congressional efforts falter. The White House rebuffed the suggestion.
Senate Majority Leader Harry Reid of Nevada sought to lower expectations of reaching a deal on the $25 billion proposal before Congress quits for the year. Banking Committee Chairman Chris Dodd, D-Conn., called the possibility of reaching agreement "remote."
Elsewhere, the governors of Connecticut, New York and New Jersey asked the federal government for a $48 million emergency grant to help thousands of financial industry workers who are losing their jobs.
The governors say preliminary estimates show that 82,000 financial services jobs in the New York City metro area will be lost by the end of next year because of the global economic downturn.
The governors say the emergency grant would allow the states to give each laid-off worker $12,500 to help them find jobs and relocate, and provide them with other services.