WASHINGTON (AP) - The economy was in deep pain even as the government pushed forward Wednesday with its latest financial rescue plan to exchange taxpayer money for stakes in the nation's banks.
On Wall Street, the Dow shed more than 500 points on worries the U.S. was in a recession or soon would be, despite the plan announced Tuesday. The market for lending between banks - a key gauge of the plan's effectiveness - remained tight, although there were some signs of improvement.
And the Federal Reserve's snapshot of business conditions nationwide showed that the economy continued to lose traction, reflecting mounting damage as financial and credit problems took a turn for the worse.
President Bush, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke sought to reassure anxious Americans that relief will come. But they said it will take time and patience for the plan's unprecedented steps to stabilize the system, induce banks to lend again, and - in time - help improve the economy.
Bush, in a meeting with his Cabinet, said he's confident that “in the long run, that this economy will come back.”
But the economy was showing the hurdles it has to leap to meet his prediction. Retail sales dropped in September and wholesale prices remained high.
The Fed said economic activity weakened across all of its 12 regional districts, according to the report commonly known as “The Beige Book.” Consumer spending - the lifeblood of the economy - slumped in most Fed regions. Manufacturing also slowed in most areas.
“This will take time. There will be challenges,” Paulson said on ABC's “Good Morning America.”
Bernanke also called for patience. He said the economy was currently battling a severe credit crunch, slowdowns in consumer spending and business investment and rising unemployment.
“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Bernanke said in a speech to the Economic Club of New York.
The Fed chairman, who has worked closely with Paulson in the current crisis, said the government's new powers under the $700 billion financial bailout package passed by Congress on Oct. 3 should help reduce risks and restore confidence.
But investors weren't able to cast off their worries that the lack of credit in the system would continue to pound the economy, forcing businesses to cut jobs and reduce spending on supplies, equipment and raw materials.
Unprecedented steps recently taken - including hefty interest rate reductions by the Fed and other major central banks in a coordinated assault just last week - have failed to break through the credit clog and the panicky mind-set gripping investors.
Sales at U.S. retailers fell with a thud in September, dropping by 1.2 percent, the most in three years. Retail sales have fallen for three consecutive months, the first time that has occurred on government records dating back to 1992.
Uncertainty about the economy - and their own financial fortunes - probably will force consumers and businesses alike to hunker down further even as the important holiday shopping season begins.
“The consumer shut up shop even before the markets got crushed and that is not good news for the economy,” said Joel Naroff, chief economist at Naroff Economic Advisors. “What is ominous is that the declines in spending were broad based.”
As consumers pull back, it raises the odds the economy will contract later this year and early next year. Some think the economy may have jolted into reverse in the recently ended third quarter. One classic definition of a recession is two straight quarters of contracting economic activity.
Another report showed wholesale prices dropped for the second straight month, as energy costs retreated from record highs. Yet many other prices are up sharply over the past year and are squeezing businesses. When energy and food prices are stripped out, all other wholesale prices tracked posted their biggest annual increase in more than 17 years.
Meanwhile, the Commerce Department said businesses increased their inventories in August by the smallest advance in five months. That data, gathered before the financial markets recently had some of their worst days ever, reflects the serious problems in the market for commercial paper, where businesses obtain short-term loans to fund their day-to-day operations.
The stew of bad economics news pushed the Dow Jones industrials down about 500 points in afternoon trading, giving back a chunk of the index's huge 936-point advance from Monday. Broader indexes also slumped: The Standard & Poor's 500 index fell 6.5 percent and the Nasdaq composite index fell 5.5 percent.
Credit markets also remain strained and demand for safe assets remains high. The three-month Treasury bill's yield slipped on Wednesday. Low yields show that investors are willing to earn meager returns as long as their investment is preserved.
Key lending rates between banks in the U.S. and Europe inched down after major central banks offered the banking sector unlimited amounts of short-term loans in dollars. This was meant to keep credit markets flowing while lenders regain confidence in the interbank lending system and came on top of government rescue packages. Across different national plans, European governments and the U.S. have over the past several weeks committed some $3 trillion to bank guarantees, equity injections and other assistance.
Anxiety about the economy is the No. 1 concern of voters. With the presidential election just weeks away, Democrat Barack Obama and Republican rival John McCain are working furiously to convince voters that each is the best choice to steer the economy through these perilous times.
Many economists believe the country is on the edge of - or already in - its first recession since 2001.
If the government's new plan works - it will merely cushion the blow. Democrats on Capitol Hill are pushing for another round of stimulus that could cost as much as $150 billion, an effort to provide additional relief and lift the country out of the doldrums.
Big U.S. banks started falling in line Tuesday behind the rejiggered bailout plan.
Initially the U.S. government will pour $125 billion into nine major banks with the hope that they will use the money to rebuild their reserves and to increase lending to consumers and businesses. Another $125 billion will be made available this year to other banks with potentially thousands of institutions eligible to receive cash infusions.
In return, the government will get ownership stakes in the financial institutions. Banks, meanwhile, will have to accept limitations on executives' compensation.
The first bank to take advantage of the program was Bank of New York Mellon which announced it would sell $3 billion in preferred shares to the Treasury. Other banks initially participating include Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase, Bank of America Corp., including the soon-to-acquired Merrill Lynch, Citigroup Inc., Wells Fargo & Co., and State Street Corp.
Besides Bank of New York Mellon, JPMorgan and Wells Fargo expect to each receive $25 billion of the government investment. The remaining six largest institutions haven't confirmed their slice of the $125 billion to be split up among the group of nine, but the pie is expected to be divided according to the banks' sizes.
