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Dive in Philly Fed index stokes recession fears

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Optimists on the U.S. economy have conceded that things are weak, but they’ve argued we’re not falling off a cliff.

But on Thursday, Wall Street got a hint that a cliff dive could be imminent.

The Philadelphia Federal Reserve Bank’s index of economic activity in the mid-Atlantic region plummeted to a negative 30.7 this month, down from a positive 3.2 in July and the lowest since a negative 30.8 reading in March 2009 -- in the depths of the last recession.

The index measures various aspects of business activity in the region, including new orders received by companies, shipments of goods and employment trends.

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Economists were stunned -– and that rippled into the stock market, already unnerved by fresh concerns that Europe’s debt crisis could trigger a new banking meltdown. The Dow industrials were down 471 points, or 4.1%, to 10,938 at about noon PDT, with an hour of trading to go.

In a note to clients, Goldman Sachs economists said previous declines in the Philly Fed index to August’s levels have “only been observed in or immediately prior to recessions,” with the exception of a brief period in 1995.

Neil Dutta, economist at Bank of America Merrill Lynch in New York, said the Philly index and other Fed regional indexes have typically been sensitive to swings in the stock market. With market volatility exploding since late July and share prices plunging, Dutta said, “The question at hand is whether the weakness in market sentiment prompts businesses to stop investing and consumers to stop spending. When in doubt, do nothing.”

The regional business index for the Fed’s New York branch also showed a drop in August, to negative 7.72 versus negative 3.76 in July. That index was reported on Monday.

-- Tom Petruno

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