Businesses cut prices at a record rate and builders started fewer new homes last month than any time on record, according to new government data, as the outlook for the economy continues to dim.
The data helped spur another terrible day for the stock market, as did a projection of more hard times ahead by leaders of the Federal Reserve.
After gyrating wildly for weeks, the Dow Jones Industrial Average closed below 8,000 for the first time since early 2003 as concern spread that the economy might be beset by a chronic and debilitating decline in prices.
The Labor Department reported that prices of consumer goods and services fell by a record 1 percent in October, the biggest drop in the 61-year history of the index. New-home starts fell to their lowest level in the 49 years the government has kept that data.
While most consumers might welcome the idea that things are getting cheaper, deflation is an economists' nightmare. It was a hallmark of the Depression and Japan's so-called lost decade in the 1990s. A big worry is that deflation would blunt the impact of interest rate cuts by the Federal Reserve, forcing policymakers to use other tools to try to revive the economy.
Much of the 1 percent drop in the Consumer Price Index — a measure of how much Americans pay for groceries, entertainment and other goods and services — could be traced to a 14 percent drop in the price of gasoline, but the cost of other goods also fell sharply, including clothes, milk and vegetables.
Donald Kohn, vice chairman of the Fed, said the risk of deflation, which is defined as a "general decline in prices," remained slight but had increased. "Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small," Kohn said. The Fed, he added, would be aggressive, if necessary, to prevent a broad drop in prices.
Federal Reserve leaders released projections indicating they expect the economy to worsen significantly in the coming year. The most pessimistic of 17 Fed officials expects joblessness to rise to 8 percent at the end of 2009, which would be the highest in a quarter-century.
"We're in the deep portion of the economic trough," said Richard Yamarone, chief economist of Argus Research, explaining the market sell-off.
How much more to go? Dow 7,000? Dow 6,000? Many analysts are reluctant to say, having been proved wrong so many times before. The Dow has lost nearly 40 percent this year, and many of its blue chips, from Alcoa to General Electric, are down more than that.
Asian stock markets tumbled today, with Japan's main index losing nearly 5 percent.
Even though the Fed's target interest rate is very close to zero, economists say there is much more the central bank and the government can do to revive the economy.
In a speech in 2002, before he was the chairman of the Fed, Ben Bernanke said central banks could combat deflation by buying longer-term Treasury and mortgage-backed securities to drive down interest rates.
"The Fed is going to ram liquidity into the financial system whether it is asking for it or not, just going out and buying assets and printing money in order to do it," said Alan Levenson, chief economist at T. Rowe Price. "If you jam money into everyone's pocket, they will spend it."
Analysts say a sustained decline in consumer prices would be terrible for the economy. Businesses that cut prices to attract buyers are likely to have to lay off workers as well. They may also have little left over to pay lenders or shareholders.
Prices are falling outside the United States, too. Consumer prices declined in Britain, France, Germany and elsewhere in Europe in October, and prices were flat in September in Japan, which has fought deflation on and off for nearly two decades.
The decline in consumer prices is all the more remarkable because this summer many economists were concerned about inflation and the prospect for stagflation, in which inflation and unemployment rise simultaneously, contrary to their usual relationship.
That concern has been quickly dashed, in large part because of a steep drop in commodity prices. Crude oil prices, for instance, have fallen more than 63 percent from their July peak of $145.29 a barrel, to $53.62 on Wednesday. The national average price for unleaded gasoline is now $2.05 a gallon, down from $2.92 a month earlier, according to auto club AAA.
U.S. motorists, stung by record gasoline prices, job losses and falling home prices, left the roadways in droves, logging almost 11-billion fewer miles in September, according to the Transportation Department. Governments, businesses and consumers have also slashed energy expenditures.
It now seems clear that the nation is entering a more frugal era after several years of conspicuous consumption.
High-end retailers are resorting to drastic discounting to lure customers into stores. Executives at Nordstrom, the department store chain, said on a recent conference call with analysts that the company had lowered prices on more than 800 clothing styles by an average of 22 percent. Saks, another department store, is promising customers who spend more than $2,000 loans that carry no interest and require no payments for 12 months.
Airfares, which were rising along with energy prices this summer, are now sliding as airlines struggle to fill seats on many popular routes. The average price of a one-way ticket is down about 20 percent from July, to $107 in mid November, according to Harrell Associates, which tracks the airline industry.
Still, the so-called core price index — which excludes energy and food — was down a more modest 0.1 percent. The prices of goods and services like meat, alcohol, medical care and education increased in October.
"It would take significant and persistent contraction in the economy to push core inflation into negative territory," said Dean Maki, an economist at Barclays Capital in New York. "We do not think that is likely, especially given the aggressive policy response on the part of the Fed and Treasury."