President Bush and Fed chief Ben Bernanke on Thursday endorsed a fiscal stimulus to boost the economy as a key factory index sank to its lowest level since the 2001 recession and housing starts dived.
"Fiscal action could be helpful in principle" and, combined with Fed interest rate cuts, "may provide broader support for the economy," Bernanke told the House Budget Committee.
Bush also believes "some boost is necessary," according to White House spokesman Tony Fratto.
Bernanke didn't propose any specific measures to aid the economy, which many analysts say is teetering on the edge of recession.
The Philadelphia Fed's mid-Atlantic manufacturing gauge plunged 19.3 points in January to -20.9, the lowest since October 2001 and far below Wall Street forecasts of -1.5. Negative readings indicate contraction.
"Rarely has the Philly survey been this weak without the economy in the throes of economic recession," Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., said in a note.
The new orders, inventories and jobs indexes also contracted, while the outlook index sank six points to five, a 16-month low.
Housing starts sank a greater-than-expected 14% in December to an annual rate of 1.01 million units, the lowest since 1991, the Commerce Department said. Starts for all of 2007 dropped 25%, the biggest slide since 1980.
Building permits, an indicator of future activity, fell 8% in December to an annualized 1.07 million, the lowest in more than 14 years.
Jobs data on Thursday were mixed. New jobless claims unexpectedly fell by 21,000 to 301,000 last week, the lowest since September, the Labor Department said. But the number of those seeking benefits after an initial week of aid rose to a near two-year high.
Stocks sold off on the gloomy economic data. The S&P 500, hard hit by bad news from Merrill Lynch and other financials, sank 2.9% to a 15-month low. The Dow fell 2.5% to a 10-month low. The Nasdaq lost 2% -- 18% off its Oct. 31 peak.
The 10-year Treasury yield fell 9 basis points to 3.62%, the lowest since July 2003.
Bernanke still isn't predicting a recession in 2008, saying he expects sluggish growth. But he repeated last week's pledge that the Fed stands ready to take "substantive" action to protect against rising "downside" risks to growth.
Policymakers have lowered the fed funds rate by one percentage point 19ince September. Traders overwhelmingly expect another cut of at least a half-point 15 3.75% at the Fed's Jan. 29-30 meeting.
Republicans and Democrats are divided over what to include in an economic stimulus package. Ideas being considered include tax rebates for individuals and businesses, aid to the states and more cash for the poor and middle class.
"There seems to be a fair amount of interest on both sides in getting something in place," said Keith Hembre, chief economist at First American Funds. "It's a matter of whether they can agree on what that stimulus should be."
"Tax cuts geared toward the middle class and below" would help most because they are most likely to spend, said Scott Brown, chief economist at Raymond James.
Bernanke said any relief "should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so."
He warned that a stimulus package should be temporary to avoid boosting the budget deficit.
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