A retail report, which showed frightened consumers pulling back on spending in September in a way not seen in decades, sent Wall Street stocks reeling again Wednesday, prompting a 733-point drop in the Dow Jones Industrial Average in its second-largest loss.
Sales of big-ticket items financed with loans - cars, furniture and appliances - took the biggest hit in a Commerce Department report showing a 1.2 percent drop in sales at every kind of retailer except drugstores and gas stations. The deep retrenchment by consumers, who fuel 70 percent of economic activity in the U.S., confirmed to investors that the economy is in a major recession and undermined growing optimism about banks and credit on Wall Street.
Top retailers at a gathering in New York said they are scrambling to navigate the tough credit environment and are finding it harder than ever to entice customers, put off by the churn of economic events, whether they are wealthy or of modest means.
"Retail is certainly at the eye of the storm," said Stephen Sadove, chairman and chief executive officer of luxury retailer Saks Inc., noting that the past month's wild swings in the stock market have spooked his upscale customers. "The volatility and the ups and downs in some ways freezes the consumer and gets them using their time watching CNBC versus getting out shopping."
Wednesday's return of turmoil in the stock market left the Dow and other indexes down 8 percent to 9 percent at levels 40 percent or more below their highs a year ago. That represents an astounding $7 trillion loss of wealth for investors, including the half of American households that invest in stocks for savings and retirement.
More ground was lost in early trading Thursday in world markets. Tokyo Stock Exchange's benchmark Nikkei-225 index lost 10.33 percent in morning trading, Australia's S&P/ASX200 fell 6.6 percent, Singapore's Straits Times Index was down 5.94 percent.
Although tight credit has been a major factor, analysts say, the huge stock losses also are contributing to the collapse of consumer spending. Consumers typically spend a small share of their stock gains in good times and cut back on spending when they experience big losses. The 20 percent to 40 percent drop in home values in the past couple of years has had the same effect on low- and middle-income consumers, whose wealth is tied up mostly in their houses.
The deep stock losses of the past year will cut economic growth by as much as 1 percent to 1.5 percent, according to Morgan Stanley, enough to erase growth during most quarters in the past year.
"It's dismal," said Stephen Stanley, an economist at RBS Greenwich Capital, noting that the accelerating three-month string of drops in retail sales since July is "easily the worst" since the 1990-91 recession. Other economists said the drop in retail sales during the summer quarter indicates that consumer spending overall - which includes services - fell the most since the 1980 recession.
"The intensified weakness in labor markets and the turmoil in the financial system has only made things worse" for consumers last month, said Mr. Stanley. "The tightness of credit, the significant deterioration in income prospects, and the disastrous loss of wealth in equities and housing this year will provide an overwhelmingly negative outlook for households for the next few months."
One bright spot for consumers amid the rubble of destruction in the financial markets and economy is a record drop of nearly $1 in gasoline prices since peaking at $4.11 in July, AAA Mid-Atlantic reported Wednesday. That is because oil prices have been halved from more than $147 a barrel, ending at $74.54 in New York trading Wednesday.
"The relief on gasoline prices will help" cheer consumers and buoy spending, said Mr. Stanley, but not enough to prevent a significant drop in consumer spending in the second half of the year that will snuff out economic growth and represent the worst consumer recession since 1980.
Bob Andres, chief investment strategist for Portfolio Management Consultants, said the evidence of a "significant contraction" in the economy is sobering to stock investors who had been beginning to take hope from strenuous government efforts to revive the banking and credit markets.
"The global economy is deleveraging. It has to. We have artificially grown the economy through borrowing for almost a decade and the time for reckoning is here," Mr. Andres said. "As our society deleverages, consumer spending has to decrease significantly. Consumers are under considerable pressure as income creation slows, loan-to-value ratios rise, credit tightens, the wealth effect declines, and job insecurity increases."
Federal Reserve Chairman Ben S. Bernanke, speaking to the Economic Club of New York, urged consumers and investors to be patient as the credit markets and the economy grapple with recent blows.
"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," he said. "Economic activity had been decelerating even before the recent intensification of the crisis," and prospects for most sectors has worsened in the past month.
c Kara Rowland contributed to this article in New York.