Wall Street plummets more than 2 per cent on Beige Book forecast

Wall Street plunged yesterday after a gloomy forecast of the American economy's prospects for recovery.

The Dow Jones Industrial Average tumbled by more than 200 points, a decline of 2.1 per cent, after the latest Beige Book assessment ­ compiled from research by the 12 regional reserve banks ­ said the economy remained weak between November and January.

The survey, which forecast the economy will not pull out of recession until the summer, will play a key role in the Fed's interest rate decision later this month.

The report said there were some signs the economy was beginning to rebound from its first recession in a decade, but added that the evidence was "scattered". Manufacturing had fallen in many areas, retail sales were weak, prices and wages were falling while consumer lending was softening. The only bright point was that inventories were "in good shape".

The report said: "Many districts indicate that their contacts believe a recovery will begin by mid-year or earlier, but the timing and strength are uncertain."

The remarks, which echoed a downbeat speech made by the Fed chairman Alan Greenspan last week, did little to bolster Wall Street where key markets had already fallen close to 2 per cent on weak corporate profit updates.

The San Francisco Federal Reserve President, Robert Parry, was a little bit more upbeat. "Based on traditional economic analysis, I would think you'd have to say that an economic recovery could begin any time in the first half of the year," he said yesterday.

"I cannot rule out a flat or slightly positive first quarter based on the numbers I have seen, and positive growth in the second quarter."

The report is a collection of anecdotes reported to the regional Fed banks from businesses and aims to give the Fed an idea of economic developments beyond what statistics show.

The central bank's rate-setting Open Market Committee next meets on 29 and 30 January. At the last meeting in December, the committee cut the benchmark overnight lending rate by a quarter-point to 1.75 per cent, the lowest in 40 years.

Other data yesterday had sent out mixed signals. Inflation fell in December as energy costs tumbled. It fell by 0.2 per cent last month although the core rate, which excludes volatile food and energy costs, rose by 0.1 per cent.

Meanwhile production at US factories, mines and utilities fell by 0.1 per cent, the smallest since July.

Kurt Karl, the chief US economist at Swiss Re in New York, said he had always been convinced that the Fed would cut by a quarter-point when it meets. "There are no inflation fears and that was confirmed again this morning," he said.

Meanwhile, the National Bureau of Economic Research, which recently declared that the recession began in November, this week said "with continuing declines in employment and other indicators, there is no suggestion...as yet of a trough in economic activity".