Economy feeble for months

Long before the financial chaos of September and October - before Lehman Bros. went bankrupt and Merrill Lynch needed to be rescued by Bank of America, before the government bought an $85 billion stake in American International Group and adopted a $700 billion bailout, before credit markets froze and the stock market tumbled - the U.S. economy was in trouble.

The nation has been hemorrhaging jobs all year, and consumers already had cut back on their shopping sprees. Housing prices were well into a downward spiral, and consumer confidence started dropping in January.

Perhaps all that's left is for an official declaration that the U.S. economy is in a recession. The first step in that pronouncement could come next Thursday, when the government is to release its initial estimate of third-quarter gross domestic product, the broadest measure of the economy.

But investors seem to have made their own decision already, as they focused yesterday on weak corporate-earnings reports and drove major stock market indicators down sharply - more than 6 percent for the Standard & Poor's 500 index. That brought its loss so far this year to a staggering 39 percent. The Dow Jones industrials and Nasdaq composite index each fell about 5 percent yesterday.

Major Asian, European and South American stock indexes also plunged.

Oil prices fell to lows last seen in June 2007, trading below $67 a barrel on worries about weakening demand.

Yesterday's earnings reports stoked fears that the federal government's financial intervention would not keep the economy out of recession.

Poor quarterly results from large companies in disparate sectors - Wachovia Corp., Boeing Co. and Merck & Co. Inc. - illustrated how broadly the economic downturn had spread. One bright spot was McDonald's Corp., where third-quarter profit rose 11 percent on the strength of its low-priced meals.

But other results reflected the sagging economy:

Wachovia, which is being bought by Wells Fargo & Co. for about $14 billion in stock, said it lost $23.89 billion in the third quarter, down from earnings of $1.62 billion in the same quarter a year earlier. Wachovia has the largest share of the eight-county Philadelphia banking market, with 21 percent of deposits.

Airplane-maker Boeing reported its earnings slumped 38 percent as a strike and supplier-production problems hurt results.

Merck said it would slash 7,200 jobs as part of a new restructuring program. The drugmaker's third-quarter profit plunged 28 percent, partly because of flat sales.

Earnings also fell at drugmaker GlaxoSmithKline P.L.C., paper company Kimberly-Clark Corp., insurer WellPoint Inc., drug-developer Wyeth, insurer Allstate Corp., and Northwest Airlines Corp.

Earnings at AT&T Inc. rose, but missed analysts' expectations.

"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in an interview this week. Yahoo is slashing 1,500 jobs while it braces for a deep downturn likely to extend well into 2009.

"Right now, we have nine million Americans out of work," said Alan Valdes, vice president of trading firm Hillard & Lyons. "That's up from six million this time last year. And to every trader on the floor, to every trader upstairs, that's the most important number" because consumer spending makes up two-thirds of the economy.

The drop in oil prices since July also is a sign of the struggling economy. Crude oil futures fell $5.43 yesterday to $66.75 a barrel on the New York Mercantile Exchange.

"The main theme here that's driving this market into new low ground is demand deterioration," said Jim Ritterbusch of energy consultancy Ritterbusch & Associates.

The U.S. Energy Information Administration said yesterday that crude-oil inventories jumped - because of the drop in demand - 3.2 million barrels last week, above the 2.9-million-barrel increase expected by analysts.