US Recession Fears Drag on Wall Street

Fresh signs of a recession in the US have dragged Wall Street lower in early trading, denting hopes of an easing in the world financial crisis.

US consumer confidence fell to its lowest recorded level this month and the number of houses being built fell to a new seventeen and a half year low last month, down 6.3% to 817,000 and well below forecasts of 880,000. The gloomy news sent the Dow Jones industrial average down 117.6 points to 8861.6 in early trading. By lunchtime in New York the index had come back to 8961.1 - down 0.2% or 18 points.

The fall in the Dow came after the latest attempt by President George Bush to reassure Americans that the government's $700bn bail-out of the banking system would work.

Speaking before trading began in Wall Street, Bush said the credit system would take "a while" to thaw, but Americans should be confident that it would.

"If we had not acted, it was going to affect the American people directly," Bush told the US Chamber of Commerce.

"It took a while for the credit system to freeze up, it's going to take a while for the credit system to thaw. These decisive measures aimed at the heart of our financial challenges, they're big enough and bold enough to work. The American people can be confident that they will."

He said the US was working with European countries to resolve the global crisis. "We're determined to overcome this challenge together," he said.

However, confidence in the economy among ordinary Americans has plunged in response to the financial crisis gripping the globe. The University of Michigan report showed a dive in its confidence index from 70.3 in September to 57.5. The measure, which averaged 85.6 in 2007, was lower than forecast.

With falling house prices, rising repossessions and the credit crunch making it difficult to get mortgages, builders are cutting back on construction projects. Further cuts in consumer spending, which accounts for more than two- thirds of the economy, will deepen a recession.

"Even gasoline-price decreases were overpowered by the massive destruction of wealth,'' said Michael Feroli, an economist at JP Morgan. "Things are pretty awful in the economy and that should make itself felt through weaker consumer spending."

The news follows poor US industrial production figures yesterday. Dimitry Fleming at ING Bank said: "There is little doubt that the housing crunch is still in full swing. This report pre-dates the financial crisis entering a next phase in October. So the next few months will show whether the bail-out plan is or is not helping the housing sector.

"The first glimpse is bad though, with builders' sentiment taking a battering in October, dropping three points to a new record low. Until new home sales stop diving, the best thing for homebuilders is to continue slashing production. Judging by today's report they understand this."

Trading in London shrugged off the poor news from the US and the FTSE closed up 201 points at 4063 - a 5.2% gain.

All the major banks except HBOS were trading up as the sector benefited from a sharp fall in overnight interbank lending rates and optimism that the government's bail-out plan would succeed. However, insurers, thought by some to be the next sector to feel the pressure of the credit crunch, were down sharply, led by Norwich Union owner Aviva, down 17%, and Standard Life, down 6%.