Recession's official. Now what?

Markets dive as economists see a long downturn

Now that a group of top economists has officially declared the US economy in recession, a key question remains: When will it end?

With the answer still far from certain, the Dow Jones industrial average suffered one of its worst losses ever, plunging nearly 700 points on reports of a worsening downturn, including a survey that showed US manufacturing activity falling to its lowest since the recession of 1981-82. The Dow shed nearly 8 percent to close at 8,149.09.

The technology heavy Nasdaq Composite fell 137.50, or 9 percent, to 1,398.07. The Standard & Poor's 500 index also lost 9 percent, or 80 points, falling to 816.21.

The dismal economic data were underscored by the National Bureau of Economic Research, which made official yesterday what many economists and millions of unemployed people already knew: The economy is in recession. The Cambridge nonprofit, which dates US business cycles and counts the nation's top academic economists among its researchers, said the economy slipped into recession a year ago.

Many economists expect the recession to last into spring, which would make it at least 17 months long. The longest post-World War II recessions, 1981-82 and 1973-75, each lasted 16 months.

"We're in for a rough four months, at least," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. "It's likely to be as long as the 1981 recession, and probably as deep."

The prospects of a long, deep reces sion sparked a rally in Treasury bills as investors sought safe havens to protect their money. The interest rate on the benchmark 10-year Treasury fell to 2.75 percent, among the lowest levels in 50 years. Interest on Treasury notes moves in the opposite direction of their price, so when buyers bid up the price, the interest rates decline.

"People are fearful and frozen and almost paying to save their money," said Larry Glazer, managing partner at Mayflower Advisors, a Boston financial adviser. "It's kind of dicey out there."

Federal Reserve chairman Ben Bernanke, in a speech in Austin, Texas, yesterday acknowledged the US economy is likely to remain weak for some time. With the Fed's benchmark short-term interest rate already at 1 percent, Bernanke suggested further reductions of the rate, which banks charge each other for overnight loans, are likely to have minimal impact in stimulating the economy. He raised the prospect of the Fed buying Treasury bills to directly lower long-term rates.

Typically, the Fed's cuts in short-term rates influence long-term rates for loans such as mortgages, but long-term rates have remained stubbornly high, analysts said. Businesses rely on long-term borrowing for expansions, and consumers for housing and other big-ticket purchases. Lowering long-term rates could encourage new business and consumer spending, analysts said.

The National Bureau of Economic Research has dated the beginning and end of US recessions since the 1920s and became the official authority in the early 1960s, when the Commerce Department adopted its business cycle dates. The bureau does not typically make the official call until several months after the US economy enters or exits a recession.

Although "recession" is commonly defined as two consecutive quarterly declines in gross domestic product, or the economy's output of goods and services, the organization defines a recession differently, as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."

For much of the past year, it wasn't clear when the recession began. Although employment peaked in December and has fallen in each of the past 10 months, gross domestic product expanded in the first six months of the year.

Ultimately, the bureau's business cycle dating committee found that other measures, such as personal income, began to slide near the end of last year, and concluded that economic activity had begun a broad and significant decline, or a recession, in December.

"Determining when the turning point in economic activity is is much more delicate than saying things are worse than they were," said James Poterba, bureau president and an MIT economics professor. "It's rare that all the economic indicators point in the same direction, and the committee waits until it is reasonably confident that it can zero in on a particular month."

Robert Gavin can be reached at rgavin@globe.com.