Bad Economy Casts Pall On Markets

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Stock prices were down again Thursday following another big plunge Wednesday. The market is falling at a time of big warning signs for the economy. The government said Thursday that output by the nation's factories, mines and utilities was down sharply in September. And sales at the nation's retail stores are way down as the holiday shopping season approaches.

RENEE MONTAGNE, host:

This is Morning Edition from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Good morning. Stock prices are down again this morning. The market is falling at a time of big warning signs for the economy. As of a few minutes ago, the Dow Jones Industrials were down about 168 points. The government said today that output by the nation's factories, mines, and utilities was down sharply in September. And sales at the nation's retail stores are way down just as the holiday shopping season approaches. That's some of the bad news. NPR's Jim Zarroli joins us now. Jim, good morning once again.

JIM ZARROLI: Good morning, Steve.

INSKEEP: So the people who were manic on Monday are depressive again today?

ZARROLI: Yeah. Well, you know the stock market is still a pretty dangerous place. Yesterday, the Dow Jones Industrial Average had its biggest one day percentage drop since the crash of October 1987. And there have just been big drops elsewhere in the world. Japan's stock market was down really sharply today. I think all of this just says, you know, there's a lot of concern about the economy. We're seeing signs that, you know, even if all these steps that the government is taking to bailout the economy work, the economy is probably already in recession, and it could be a really long one.

INSKEEP: Jim, I'm imagining that a lot of these swings are driven by the huge institutional investors who have billions and billions of dollars invested, but let me ask about individual investors, people with 10,000 or 100,000 or whatever they might have. Are they panicking at this moment?

ZARROLI: Well, some of them definitely are. I mean Trim Tabs, the research firm, says that investors pulled a record amount of money out of stock mutual funds in September, $2 trillion. You know, and that's the kind of thing that can feed on itself. The more people cash out of stock funds, the more funds have to sell shares.

It's also a problem with hedge funds which are just a huge force in the financial markets. You know, they have always used a lot of leverage. In other words, they borrow many times the value of an asset. So when they start to lose money, they basically have to start selling off assets so they can pay their lenders back. And that's what happening now.

INSKEEP: It creates a snowball effect, doesn't it?

ZARROLI: Exactly, it's a vicious cycle. It drives down prices even more.

INSKEEP: The more you sell, the more you have to sell. Let me ask about the fundamental problem that we were talking about just a couple of weeks ago, before people were talking about an actual recession, back when they were just talking about a possible recession. We were worried about the credit crisis, about the inability of credit. Is it getting any easier for businesses to borrow, Jim?

ZARROLI: Well, you know, over the past day or so, ever since the government said that it would put money into banks on Monday, we have seen a bit of a decline in what's called the London Interbank Offered Rate. It fell a little more today. LIBOR is used to determine interest rates in the United States, so that's a positive sign. We're also seeing commercial paper markets come down a bit.

INSKEEP: OK, does that mean the bailout's working, Jim?

ZARROLI: You know, it could be. We've seen the, you know, the government come forward and take a lot of steps, a lot of efforts to get people feeling more confident in the economy. And at some point it has to make a difference. Of course, you know, things are so volatile right now that we probably need to just kind of sit back and not read too much into small movements, one way or another. I mean there have been a number of times during this financial crisis when it seemed like things were turning around, especially in the stock market, only to have them get worse. But you know, if you're an optimistic person by nature, you probably have some reason to feel optimistic this week.

INSKEEP: Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli on the latest trouble in the financial markets.

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