Slide May Not Presage Severe Recession

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A day after the U.S. Federal Reserve slashed a key interest rate, world markets were calmer. A steep two-day slide was triggered by fears of a U.S. recession, but it's unclear that a nationwide downturn is a certainty.

RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep.

If you believe the Treasury Secretary Henry Paulson, Republicans and Democrats are ready to act together to help the economy.

Secretary HENRY PAULSON (U.S. Department of the Treasury): I'm optimistic that we can find common ground and get this done long before winter turns to spring. It must be swift. The legislation must be enacted quickly, and the elements of the legislation must have immediate impact. If we miss this, we miss the mark.

MONTAGNE: Treasury Secretary Henry Paulson. More on how difficult it might be to meet the mark in just a moment.

But first, around the world, stock markets seem a bit calmer today. Most of Asia's main stock indexes closed up. The Nikkei was up two percent. Hong Kong's main index, the Hang Seng, was up more than 10 percent for the day. But everywhere, the message seems clear: investors liked the surprise rate cut yesterday by the Federal Reserve. The question is, did they like it enough? Will we avoid a recession?

NPR's global business correspondent, Adam Davidson, joins us to talk about that. And Adam, for most of the last two days, the markets all moved in the same direction - down. Today, things are much more mixed. Is that good? Is that bad? What?

ADAM DAVIDSON: Well, what's really struck me in the last couple of days is how we, you know, we have this globally-interconnected economy, but here we're being reminded that time zones really matter; sunlight really matters.

We have, you know, President Bush made his announcement on Friday about his fiscal stimulus package. It took until Monday for Asian markets to open and respond - they didn't like it, they plummeted.

Europe was responding both to the Asian markets and to President Bush before the U.S. markets had a chance to wake up and respond. Ben Bernanke came out with his statement and his dramatic rate cut move.

Now, Asia is getting a chance to respond to that. It's sort of - everybody is, a little bit, playing catch up with whoever came before as the globe keeps spinning - which I find kind of fascinating.

But it does seem like everyone's slowly getting on the same page, that the drama, at least for a little while, may have passed and things will be calming down. And down is the word. I mean, over the last two days, even though they climbed up a little, they are - all the indexes are heading down for the week.

MONTAGNE: Well, with a moment to breathe, can you put the past two days in perspective? How dramatic of a sell-off was it?

DAVIDSON: These were very dramatic numbers. In the last two days, some of the main indexes lost well over 10 percent. And even with today's - in Asia, with a lot of the indexes gaining a lot of ground - I didn't see any that gained all the ground they lost. I mean, these are still pretty dramatic losses for a day or two.

But I spent the morning looking at charts for most of the major indexes all around the world - Asia, Europe, the U.S. - and what I saw was a consistent story. If you go back two years, three years, five years - all of these are way, way up. And what they've lost in the last two days, in the last few weeks, is nowhere near the gains they've made.

So if you're a long-term investor, if you have 401(k) that you don't monitor on an hourly basis, you're still doing pretty well over the last few years, and it's probably best not to pay too much attention to these short fluctuations.

MONTAGNE: Looking ahead to the next few days and weeks - and this is on, obviously, many people's minds - how will we know if there is a recession, or a recession coming?

DAVIDSON: Yeah, the - there are going to be investors and economists and business reporters obsessing over every piece of economic news that comes out.

Tomorrow, there's going to be existing home sales numbers for December, released. On Monday, there's going to be new home sales. On Tuesday, there's going to be consumer confidence. Later next week, there's going to be numbers on personal income and personal spending for December. All of these numbers are going to be poured over.

And this is a time, if you care about whether or not we're going into a recession, this is a time to pay attention to those because they are going to be the things that tell us if we are heading into a recession.

There are four or five states where there's no question, the economies are contracting, there is a recession. There are some sectors, like housing, that are clearly doing really poorly. But for the average American, it's not yet clear how the next few months are going to be for you.

MONTAGNE: And is there any place in the world that things look good, Adam?

DAVIDSON: It's hard to see. This is what we had hoped, and this is sort of what the last two days, you know - it killed a bit of the hope that some people had. There was hope that Asia could kind of keep the global economy growing, could demand U.S. goods, U.S. exports; that they could keep things humming along. What the last two days seem to suggest is that the global economy is linked, and is linked to the U.S. economy, and there isn't a lot to hope for in the short term.

MONTAGNE: Adam, thanks very much.

DAVIDSON: Thank you.

MONTAGNE: NPR's Adam Davidson.

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Interest-Rate Cut Helps Markets Rein In Losses

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Traders went to work Tuesday on Wall Street with plenty to worry about. As fears about a possible U.S. recession were spreading around the world, a huge sell-off on foreign stock exchanges began Monday while U.S. markets were closed for the holiday.

Then, shortly before trading got under way Tuesday, the Federal Reserve announced a surprise cut in interest rates. It all made for a wild ride on Wall Street. The Dow plummeted early, then regained some of the lost ground and finished down 128 points.

As the day broke on U.S. stock markets, fears that there would be panic-selling by U.S. investors were foremost. They'd already weathered the worst January in U.S. market history. Futures markets suggested that U.S. indexes could loose another 5 percent Tuesday on top of the nearly 20 percent they'd already lost since the market peaked last October.

Before the market opened, Secretary of the Treasury Henry Paulson tried to reassure investors in a breakfast speech to the Chamber of Commerce in Washington, D.C. He expressed confidence that President Bush and Congress shared a sense of urgency about passing an economic stimulus package to head off recession.

As Paulson continued his speech, an even bigger economic player made a move. The Federal Reserve said it was making a three-quarters-of-a-percentage-point rate cut because of continued deterioration in the financial markets and a weakening economy.

It was the largest single cut since the federal funds rate became the Fed's principle tool for monetary policy — bigger than the one after the Sept. 11, 2001, attacks and after the 1987 market crash.

In the first few minutes after the opening bell Tuesday, the market plummeted more than 460 points despite the Fed's forceful action. But almost immediately investors started clawing their way back. Just after 10 a.m., the Dow Jones industrial average had recovered about half of its initial loss.

Some of the most distressed shares — such as stocks in financial companies that were participants in the subprime debacle — will be among those that benefit most from the Fed's big rate cut. Retailers will benefit, too, and their shares also helped the market recover Tuesday.

In the end, the Dow finished down 128 points — 336 points above its low for the day. It's a testament to the market's problems that this outcome is viewed as something of a victory.

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