US, European stocks dive on recession fears

US and European stock markets dived Wednesday after dismal US economic data added to recession fears and automakers called for government bailouts to stave off collapse. After European markets closed, the Federal Reserve slashed its economic growth forecast from four months ago and acknowledged the risk of a US recession into 2009, further rattling investors. US stocks plunged to five-and-a-half-year lows after data revealed a sharp deterioration in the world's largest economy. The Dow Jones Industrial Average tumbled 427.47 points (5.07 percent) to finish at 7,997.28. It was the first time the blue-chip index closed below 8,000 since March 31, 2003. The tech-heavy Nasdaq skidded 96.85 points (6.53 percent) to 1,386.42, its lowest level since April 14, 2003. And the broad Standard & Poor's 500 index retreated a hefty 52.54 points (6.12 percent) to 806.58, another five-and-a-half-year low. The Fed's latest forecast said the economy could grow as much as 1.1 percent or contract by 0.2 percent next year, and lowered its inflation forecasts. That compared with Fed forecasts published in July for US gross domestic product (GDP) growth in a range of 2.0 to 2.8 percent for 2009. "By removing inflation from the list of major risks to the outlook, and instead highlighting deflation as a new risk, the Fed is essentially giving itself carte blanche to move ahead full bore using all tools and facilities at its disposal," said Brian Bethune, chief US financial economist at IHS Global Insight. "Thus, the month of October represents an important watershed in terms of the approach taken by the Fed, and we believe that this is a positive signal for the ultimate resolution of the crisis." Dismal US government reports showed a record fall in consumer prices and a record low in starts on housing construction, as struggling automakers begged Congress for a second straight day for a bailout. "Talks on aid to automakers appear doomed in Washington and economic reports suggest a deepening recession," said Al Goldman, analyst at Wachovia Securities. Dealers said pleas for government help by the three top US auto firms -- General Motors, Ford and Chrysler -- hit sentiment as investors worried about the impact on employment and the wider economy if any one were to fail. Company officials told lawmakers Tuesday that the economy faced a "catastrophic collapse" if the government does not come through with 25 billion dollars in loans needed to keep their business afloat. US consumer prices plunged a record 1.0 percent in October, with the 12 months headline rate falling to 3.7 percent from 4.9 percent in September. "With economic growth and inflation pedaling backwards, deflation talk is deafening," said Jennifer Lee at BMO Capital Markets. "Tighten your seatbelts as fourth-quarter growth is going to be ugly." The Commerce Department reported separately that builders broke ground on the fewest number of new homes since it began publishing the data in January 1959. Housing starts were down 38.8 percent on a 12-month basis despite government efforts to revive credit flows and stem a rising tide of foreclosures in the wake of the collapse of the housing market in mid-2006, the epicenter of the current financial crisis. Permits to build new homes, an indicator of future activity, dropped 12.0 percent to the slowest pace since that data was first published in January 1960, and were down 40.1 percent from October 2007. "When will starts turn around? If financial conditions improve, most likely about the middle of next year. But between now and then, starts are almost certain to drop another 20 percent," said Patrick Newport, analyst at IHS Global Insight. "Today's report suggests that housing activity will continue to decline for some time," said Gary Bigg at Bank of America. "With a variety of headwinds facing the housing industry -- financial market turmoil, rising unemployment and tight credit among them -- a recovery in construction activity is not expected until mid-2009 at the earliest." European stock markets tumbled on the dire US data. London's FTSE 100 fell 4.82 percent to 4,005,68, the CAC 40 in Paris lost 4.03 percent to 3,087.89 and in Frankfurt the DAX tumbled 4.92 percent to 4,354.09. Latin America's biggest index in Sao Paulo fell 2.02 percent and Mexico dropped 2.41 percent. Stocks in Asia slipped earlier Wednesday on concerns about the US auto industry and fears of a global recession. Tokyo lost 0.66 percent, Hong Kong 0.77 percent and Sydney 0.7 percent.