The Wall Street Journal is reporting Paulson to Meet With U.S. Bank Chief.

Treasury Secretary Henry Paulson has called the top U.S. banking heads to a meeting today in Washington, people familiar with the matter said.

Stocks of all sizes and shapes are trading up today, but which ones will continue to do well if the market holds up'

In the graphic to the right (courtesy of Yahoo) I highlight nine large cap stocks that appear to be the biggest targets of institutional interest not just today, but when the markets moved up in spurts last week too. Those that made the cut did so on the basis of several price factors and several volume factors. The list consists of five technology names ([[MSFT]], [[AAPL]], [[RIMM]], [[ORCL]], and [[DELL]]), two mining/metals stocks ([[RIO]], [[FCX]]), and two energy stocks ([[PBR]] and [[CHK]]). Interestingly, two of the nine companies are based in Brazil.

The intervention by the Treasury and the Federal Reserve at the time of the collapse of Bear Stearns shall henceforth be celebrated by economic historians as a punctuation point in American financial history. I believe that historians will mark it as a watershed event which began the dismantling of the unregulated free market philosophy which has been the hallmark of the American government since Barry Goldwater espoused that philosophy over 40 years ago. (And went down to ignominious electoral defeat in 1964.)The discredited Goldwater philosophy, though, brought to power Ronald Reagan and since 1980 the conservative ideal has for the most part flourished. In the years when it did not flourish, it still succeeded in defining the debate.

This election appears to be the advent of another defining moment. We are about to re-regulate in a very big way. I think that one of the unintended results of the financial crisis will be an even greater regulatory impulse. I say that because the public coffers will be bare and I think that our elected representatives will have enough common sense to refrain from imposing tax increases which might threaten an already fragile economy. I also think that they will realize that the same common sense demands that spending should be restrained as well.

Global stock markets have traded higher after central banks from the US, Eurozone, UK and Switzerland worked in coordinated effort to pump unlimited US dollars (which used to be capped) into the global financial system Monday, and following the announcement of various central banks working hard and pledging their resolve to “not let banks fail” and “doing all they can to support the financial system”. Economically, nothing has been altered in a perceivable way, but psychologically, that is a boost to investors’ confidence. Credit markets, and not to mention the stock markets, basically work on the basis of confidence, so that explains the rise in Asian, European and US stocks today.

Are we going to see a major return to carry trades as a result of this “global effort”' Hardly . Although the US dollar initially lost its footing, it later rebounded to trade higher against many currencies like the Euro and Swiss franc in forex trading. As long as people are feeling the heat from the ongoing economic and financial turmoil, the US dollar is likely to retain its uptrend bias of higher highs and higher lows (not in a straight rally of course).

In the financial crash, we are seeing two forces at work: first, a corrupt system of unregulated leverage gone mad — virtual value (which is to say, bullsh*t) created in derivatives — but second, a world whose fundamental structure is changing in ways we can’t yet fully fathom.

I can’t yet get my head around the new structure; no one can. So I want your help in cataloguing differences from a high altitude (and calm heart) as we figure out not only their dangers but also their opportunities and as we try to understand the new architecture of things.

Rebecca Engmann Darst co-authored this report.

Morgan Stanley (MS) – A tense weekend for shareholders of Morgan Stanley whose shares fell into the single digits having been as high as $69.02 last October. Shares are higher by 68% today at $16.22 following the long-awaited accord with Japan’s UFJ. The restructured deal gives the Japanese giant preferred stock yielding 10% rather than common stock – very Buffettesque. Option activity on the shares led the leader board for the most active individual equity contract, with buyers of October calls at the 17.5 and 20 strikes notable. The puts were traded evenly between buyers and sellers in October, while the November 30 strike calls where volume reached 9,641 lots, traded to the buy side at around 25 cents apiece. Implied volatility on the stock fell making it one of our largest decliners today as it dropped in half to 195%.

A lot of criticism has been aimed at venture capitalists the last few days. The VCs are telling their portfolio companies to get ahead of the curve and conserve cash right now, and companies are starting to take their advice.

The criticism is coming from people who don’t understand that the world has changed in the last week and that companies need to change with it. And so they’re asking why VCs waited until now to tell everyone to conserve cash. Others are saying the boom is the VCs fault, and for them to lecture companies on conserving cash is ironic.

Would it surprise anyone to see the "biggest day gain in history" or "biggest weekly gain in history"'This is a melt up if there ever was one. As I said, when this rubber band finally one day does snap it would be tremendous (reversion to mean). And this once again shows why bear markets are hard on bears and bulls alike - imagine entering this day positioned the only way you could be to make money the previous few weeks (heavily short) - you'd be decimated. We were fortunate with some market timing and eviscerating our short exposure Friday morning. Better to be lucky than good, but preferable to be both.

Suppose you are watching US equity markets.  You could be thinking of bailing out.  You might be someone who has been in cash, but you do not want to miss the "bottom."  Whatever your position, you seek some magic indicator.

We have already provided the basics that should help readers make this decision.  Here is some extra color, but still not the full picture.  We are sorry. It has been a busy time.

This, boys and girls, is what you call a relief rally in markets. There are some staggering numbers out there, especially from Germany, Hong Kong, and Brazil indices.

As I wrote in my weekend TheStreet column, this sort of move was more or less inevitable after the sorts of downbound moves we've seen, so long as nothing imploded over the weekend. It will give rise to non-stop cries of "the bottom is in", which I don't believe, but that's not the same thing as saying a) that markets were ever going to keep falling 30% a week, or b) that we couldn't have a darn impressive run here.

Yesterday in Fannie, Freddie Commit to Waste $40 Billion a Month Taxpayer Money I talked about the chain reaction of guarantees.

Ireland guaranteed bank deposits putting Germany and the UK at a disadvantage. After criticizing Ireland, Germany did the same. The UK stepped in to guarantee bonds so now Germany and the US are at a competitive disadvantage.

The extreme in finance and economics is by definition rare, and that makes it valuable for study.

The crisis of late is no exception. It's one thing to analyze markets when everything is running smoothly, but sunny days don't offer much, if any insight about what to expect during hurricanes.

I am glad to be doing business in the U.S. and I think that the U.S. is going to emerge from the current crisis stronger and more dominant than ever before. David Leonhardt wrote today in the New York Times that the U.S. is “a power that may not stay so super”. I disagree.

A person would have to be living under a rock not to know that that the U.S. is going through a very rough economic patch. Unfortunately, it is almost certain to get a lot worse before it gets better. But I firmly believe that the U.S. is the most dynamic nation ever and will not only survive this crisis but actually be stronger and better as a result. Maybe my optimism is just wishful thinking, but below are ten reasons that I believe the U.S. will strengthen its economic position as the crisis resolves. While many countries have some of the qualities of the U.S., no country has all of our advantages. It is the unique combination of these qualities that makes the U.S. a special place to do business. So, here goes, my list of why the best is still in front of us.

A few weeks ago I wrote that money supply was about to blast off. And, last week the data showed that the Fed was pumping money (as measured by M2 on a seasonally adjusted basis) into the system at greater than a 100% annualized rate. Well, this week we’ve reached orbit and are circling the globe in a holding position in outer space. For the week ending September 29, money supply was essentially unchanged from the week before but remains up almost $200 billion in just 30 days. Reflecting the reality of where money supply had already gone, the Federal Reserve, in a coordinated action with other central banks, lowered the Federal Funds rate by 0.50%. However, this move merely memorialized what had already taken place in the money markets (and arguably should have been deeper to more accurately reflect reality).

I am surprised that M2 did not continue its climb out of orbit and into another solar system. I suppose money supply could be holding at its current level because that is what the Federal Reserve wants it to do or it could be holding because despite the Federal Reserve’s best efforts to push money supply upward it is stuck. The deleveraging process destroys money supply and maybe M2 has gotten stuck because as fast as the Federal Reserve creates money, private enterprises destroy money through an acceleration of the deleveraging process.

Your daily TED update: 457bp. Just to put things in perspective, a little, on a day when European and -- surely -- US stock markets are going to rise a lot. But I do think that the optimism (or retreat of utter pessimism) is justified, if the UK's plan is more generally adopted across Europe and the US.

Robert Peston has a nice summary of the details: Not only are there huge equity injections into banks, alongside a promise of unlimited short-term liquidity, but the UK government is forcing the banks to lend at 2007 levels, not only to each other but into the real economy. And the total capital being raised today just in the UK has reached an astonishing £50 billion.

Gartner has revised its 2009 IT budget prognostications, a move that isn’t surprising, but the firm’s projections could be a lot worse.

Peter Sondergaard, senior vice president of research at Gartner, outlined the research group’s new projections in his opening keynote at the Gartner Symposium ITxpo in Orlando (all posts and the firm’s Twitter feed). Gartner’s opening keynote is an analyst relay that is part sales pitch and part pep talk to urge technology managers to innovate, manage through tough times and be aligned with the business better.

The PE ratio needs no introduction. For a very long term chart of the ratio, click on the image to the left. The source of the chart is the NY Times with a helping hand from the economist, Robert Shiller. I was surprised to see that we were trading at a higher PE ratio as early as last year, than the top in 1929!

The graph above is based on the average earnings for the preceding 5 years. This chart is more short term, based on the rolling 4 quarters of earnings:

The futures markets are on fire (7:30 am).

The Dow is up about 4% and the S&P is up about 5% and the Nasdaq is up about 4% as well. thanks over $1Tn being pumped into the markets this weekend by Global Central Banks.  $2Tn is almost 2.5% of the global GDP so you would think we could get at least a 2.5% pop off that news alone, right'  In Washington, the Group of Seven agreed to a common framework, calling for recapitalizing banks with public and private funds, insuring depositors and unfreezing credit markets. Euro-zone nations, meeting in Paris, said they would guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies.

Last week, the indicator review concluded, "In sum, weakness has expanded this week, not dried up. As long as this is the case, it remains premature to conclude that a durable bottom is at hand." In retrospect, that was the understatement of the year. We saw a historic decline last week, in which all major indices fell to significant bear market lows. As recently noted, we saw new lows in the Cumulative NYSE TICK; money flows into the Dow stocks also turned decidedly negative. Also as noted during the week, the new high/new low measures and percentages of stocks trading above their moving averages all hit lows that I have not seen in many years of following these measures.

It’s hard not to feel the fear in this market.

I know … I feel it too.

Countries around the world have to coordinate their responses to the global financial crisis and ensure their economies remain open to investment, U.S. Deputy Treasury Secretary Robert Kimmitt said Monday.

“Because the crisis is a global event, Countries should continue to coordinate their actions to face the turmoil, so the actions taken in one country do not come at the expense of another,” Kimmitt said in a speech to the U.S. Council for International Business.

“In these times of heightened uncertainty, it is imperative that we don’t turn inward but rather embrace free investment and trade,” he said.

Kimmitt also welcomed a set of best practices for sovereign wealth funds unveiled Saturday by representatives by the state-run pools of capital as well as recipient countries.

The so-called Santiago Principles are aimed at easing concerns about politically motivated investments by the state-run funds and encouraging open investment.

The principles stipulate that sovereign funds will invest on the basis of economic and financial risk — not for political reasons — with the aim of promoting a global financial stability. Transparency and compliance with all regulatory and disclosure requirements in recipient countries are other objectives, along with the principle that the funds “should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.” –Natalie Boschat

Federal Reserve Bank of Kansas City President Thomas Hoenig said Monday that while the Fed and the U.S. Treasury have taken important steps to provide liquidity into the financial system, it is ultimately up to the financial institutions themselves to steer the U.S. out of its current credit crisis.

The U.S. needs “a 21st century J.P. Morgan,” Hoenig said in a speech to international regulators. Hoenig was referring to the financier who helped the U.S. steer through a financial crisis 100 years ago.

Hoenig said the supervisory structure in the U.S. is not the cause of the current crisis, the roots of which, he said, were ignored during the boom period. Hoenig called the Treasury’s $700 billion bailout program “an important step” in moving the U.S. out of its current crisis. – Brian Blackstone

Speaking to an international banking group, Interim Assistant Secretary for Financial Stability Neel Kashkari detailed several steps the Treasury had taken to ramp up the so-called Troubled Asset Relief Program in the past 10 days, conveying that it is working with utmost speed on the rescue effort. Here, the full text of his remarks:

WASHINGTON - Good morning and thank you for that kind welcome.

I am here today to provide a comprehensive update on the Treasury Department’s progress in implementing the Troubled Asset Relief Program (TARP).

As you know, our credit markets are frozen and lending has become extremely impaired. In recent months our government has taken strong and decisive actions, but a more systemic approach was needed. Secretary Paulson and Chairman Bernanke asked Congress for extraordinary authorities to address the extraordinary challenges in our financial markets. Every American depends on the flow of money through our financial system. They depend on it for car loans, home loans, student loans and their individual family needs. Congress recognized the threat frozen credit markets posed to Americans and to our economy as a whole. On Friday October 3, Congress passed and President Bush signed into law the bipartisan Emergency Economic Stabilization Act of 2008.

The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the Secretary, in consultation with the Federal Reserve Chairman, deems necessary to stabilize our financial markets — including equity securities. Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability.

The law empowers Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: the capital hole created by illiquid troubled assets. Addressing this problem should enable our banks to begin lending again. Our nation has successfully worked through every economic challenge we have faced and we are confident this new program will help us overcome these challenges as well.

Today, I will brief you about three areas. First, I will discuss Treasury’s strategy to develop multiple tools under the Troubled Asset Relief Program. Second, I will give you a detailed update on the many steps we have already taken to begin to implement the program. And finally, I will briefly discuss our next steps.

The economics Nobel was awarded to outspoken Bush administration critic Paul Krugman for his work on trade.

Krugman (Getty Images)

In its explanation of the award, the committee said, “By having integrated economies of scale into explicit general equilibrium models, Paul Krugman has deepened our understanding of the determinants of trade and the location of economic activity. His seminal papers published in 1979 (a) and 1980 were instrumental to the development of the new trade theory, and his 1991 (a) paper inspired the new approach to economic geography. His monographs, co-authored with Helpman and with Fujita and Venables, demonstrate the richness of the new theories.”

Via Tyler Cowen, this paper provides a summation of his work on economic geography.

Krugman is a prolific writer, who not only publishes a column for the New York Times, but maintains the Conscience of a Liberal blog, which helps shape debate on the major economic issues of the day.

His latest column appears today, and takes a positive look at the U.K.’s move to inject capital into banks, while criticizing the U.S. response.

The award is formally called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

U.S. Treasury Secretary Paulson said he and his Group of Seven counterparts had agreed to an “aggressive” plan to deal with a financial turmoil that has quickly ballooned into a “global event.” While the U.S. has come up with its own bank rescue plan, Paulson said other countries are considering options appropriate to their own situations. The $700 billion U.S. rescue plan will be used not only to buy and insure mortgage assets, but to buy equity in financial institutions, he said. “We are working to develop a standardized program that is open to a broad array of financial institutions,” Paulson said. Here is the text of his statment:

Statement by Secretary Henry M. Paulson, Jr. Following Meeting of the G-7 Finance Ministers and Central Bank Governors Washington, DC– At today’s meeting of the G-7 Finance Ministers and Central Bank Governors, we finalized an aggressive action plan to address the turmoil in global financial markets and the stresses on our financial institutions. This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections.

The G-7 is compelled to robust international partnership and cooperation. Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy.

Global financial market conditions are severely strained. In the United States, our economy has been facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges. A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets. We are squarely focused on the immediate need to stabilize our financial markets, and recognize that investor confidence is critical to restore liquidity and enhance the stability of our financial system.

As recent developments have demonstrated, the market turmoil is a global event. Governments around the world have taken actions to address financial market developments, and international cooperation and coordination has been robust. It is critical for governments to continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions, enhance market stability, and develop a comprehensive regulatory response. We must continue to closely coordinate our actions and work within a common framework so that the action of one country does not come at the expense of others or the stability of the system as a whole.

Central banks from around the world have acted together to provide additional liquidity for financial institutions, taking the necessary steps to support the global economy. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, the U.S. Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry.

Here in the United States, the members of the President’s Working Group on Financial Markets (PWG) made it clear that we will coordinate the use of our existing and new authorities to restore market confidence. Other countries are considering appropriate programs given their national circumstances, and we pledge to stay in close contact as they move forward with their plans.

I briefed my colleagues on the work we are pursuing to implement swiftly and thoughtfully the new financial rescue package. We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability. As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private capital to complement public capital. Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.

Securities regulators around the world have taken measures to enhance market stability by addressing market abuse. Here in the United States, we have taken steps to protect the savings of the American people by increasing deposit insurance limits, and the European Union member states have raised individual deposit limits to an EU-wide minimum.

The G-7 and others are working together through the Financial Stability Forum (FSF) to ensure a comprehensive, international regulatory response to the financial market turmoil. FSF Chairman Mario Draghi reported to us on the good progress that has been made in improving prudential supervision and regulation, increasing disclosure and transparency, and enhancing accounting frameworks. I am committed to making sure this work continues. We are also committed to tackling the next steps laid out by Chairman Draghi to be done by the end of this year and our ambitious agenda for 2009.

On the eve of the annual meeting of the World Bank and International Monetary Fund, there was barely a protestor in sight. Early in the morning, a pink van unloaded several people dressed in pink a few blocks from the headquarters buildings, but they were preparing to protest the financial bailout, not the World Bank of IMF. So was another guy, standing near a candy stall, carrying a tray, which one supposes was a metaphor for all the money that he’d like the government to place in it.

The World Bank was hit by a hacking incident, which one person called “professional” in nature and not the work of bored kids. A bank spokesman said, “at no point” did the attacker get into “sensitive information in the World Bank’s Treasury, procurement, anti-corruption or human resources departments.”

But it’s a long weekend. – Bob Davis

The U.S. and its closest allies agreed on common guidelines to address the world financial crisis, a move that opens the way for a series of government actions, but falls short of the joint plan that many investors had sought. Here is the text of the G-7 statement released shortly after at 6 p.m. ET

G-7 Finance Ministers and Central Bank Governors

Plan of Action

Washington— The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF’s critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.

The financial crisis is clearly weighing on the U.S.’s biggest companies, but small businesses are feeling a greater pinch as well.

Some 18% of small-business owners tell an American Express OPEN survey that they are at risk of going out of business because of economic conditions, up from 9% in August.

Almost two-thirds of respondents said the tightening of credit has affected their business, compared to 50% in August. As a result, 12% have had to lay off staff, 79% say sales are decreasing and 51% say they have had to tap personal assets to pay business expenses.

Meanwhile, small-business owners weren’t particularly encouraged by the government’s efforts to boost the economy. Only 7% said the rescue package by Congress would be effective or very effective. Some 48% said it will only be somewhat effective and 45% said it wouldn’t be effective at all. Three-quarters of respondents also said that increasing the amount of bank deposits insured by the FDIC to $250,000 from $100,000 won’t help them.

The survey, conducted Oct. 6-7 using on a nationally representative sample of 602 small business owners/managers of companies with fewer than 100 employees, also found that 79% of small-business owners said sales are decreasing. –Phil Izzo

One of the fears behind the stock market plunge is that the economic slump will come as a long and deep recession. How bad the downturn will be depends in large part on how much consumers cut back on their spending. Given the current state of household finances, the outlook is grim.

Although the Federal Reserve isn’t scheduled to report third-quarter flow of funds data until Dec. 11, further losses in the stock and bond markets as well as the continuing drop in home values virtually guarantee that household wealth — the difference between assets and liabilities — shrank further in the third quarter.

If that turns to be the case, wealth will have fallen for four consecutive quarters, something that has never happened since the Fed began tracking the quarterly data in 1951.

By so many measures — stock portfolios, home equity, and bond holdings — households are far poorer than they were just a year ago. In fact, the numbers might well show that U.S. consumers are less wealthy than they were in 2006.

And since wealth is a determinant of consumer spending, the losses, coming at a time of job cuts and weak income gains, suggest some cutbacks by households.

Even before this summer, wealth had been walloped by the credit crunch and the housing slump. Household net worth in the second quarter of 2008 was down $2 trillion from a year earlier when it peaked at $58 trillion, according to the Fed data. Household equity holdings alone plunged $1.4 trillion.

The financial bloodbath certainly continued in the third quarter. Broad stock indexes were down about 9% in the quarter, which suggests household equity holdings tumbled for the fourth straight quarter.

As bad as it has been, the losses in stocks still fall short of the carnage in the early 2000s after the tech boom went bust. From the first quarter of 2000 until the third quarter of 2002, equity wealth plummeted 50.9%, or more than $6 trillion.

Back then, the stock losses were offset by gains in home values as the housing boom really took off. Owners’ equity in real estate rose 20% from early 2000 to late 2002.

During this housing slump, however, owners’ equity has fallen for five consecutive quarters for a cumulative drop of 11.4%.

Home equity probably dropped further last quarter. Median prices for homes sold in July and August are down between 5% and 8% from their year-ago levels, and the drop in new construction means additions to the housing stock slowed down tremendously.

Consequently, homes offer less of a financial cushion than they once did. The unrealized equity in real estate has fallen to just 45.2% of total real estate, the lowest percentage on record.

In addition, households who played it conservative by owning bonds probably took a hit as well. Fixed-income securities had been holding steady in the year ended in the second quarter.

But the rampant flee to safety that occurred during the third quarter caused a drop in the prices of existing bonds that were not Treasuries. Consequently, credit-market assets probably fell last quarter.

As for liabilities, it is unlikely that consumers were able to pare back what they owe to the extent that their assets fell.

In fact, household liabilities rarely decline. In the more than 200 quarters on record, they have fallen eight times, and the average drop was only 0.4%.

What heightens the jitters about this loss of wealth is that consumers are grasping the fact that the losses affect more than their ability to spend now. Their futures are being threatened as Wall Street’s implosion has taken with it trillions of dollars in retirement funds.

The Congressional Budget Office reported Tuesday that pension funds, retirement plans and 401ks have lost $2 trillion over the past 15 months. Individuals’ 401ks alone have lost $500 billion.

Consumer confidence could take a hit this month as more people realize that their hopes for retirement will have to be delayed or altered dramatically.

Some economists anticipate that consumer spending could fall in the third and fourth quarters. Back-to-back drops in consumer spending haven’t happened since the 1990-91 recession. Given the steady erosion of wealth, a serious consumer retrenchment should not be surprising. –Kathleen Madigan

Economists and others weigh in on the shrinking U.S. trade deficit.

Trade and inventories may offset much of the weakness of consumer spending in the third quarter. However, given the global slowdown, export growth is likely to slow sharply and companies are likely to want to shed inventory in the fourth quarter. Growth is likely to be very weak in the fourth quarter. –RDQ Economics A key development this month Most of the weakness in exports was price related, with substantial declines in industrial materials and food. Consumer goods and autos were also down sharply. The only positive was capital goods, an additional negative sign for domestic investment… With the U.S. recession going global, we expect the trend of huge support to U.S. growth from net exports to end after [the third quarter]. The absence of this boost along with the intense weakness in domestic activity will likely sink the economy deeper into recession in coming months. –Ted Wieseman, Morgan Stanley Adjusted for price level changes exports fell just 0.2% but imports were down 1.5% so the “real” deficit in traded goods narrowed by $1.9 billion. For the first two months of this quarter, the trade deficit is running about $10 billion lower than in the second quarter. Consequently, growth in net exports could be enough to offset weakness in the domestic economy to prevent a drop in real GDP in the third quarter. However, the slowing global economy is likely to generate much slower growth in both exports and imports in the months ahead. –David Resler, Nomura Securities There is now the possibility that the actual contribution [from trade to third-quarter gross domestic product] will have turned out to be in excess of one percentage-point, even after accounting for the fact that the Boeing strike weighed on September exports. This is not necessarily a reason to be optimistic about the future, however. Our economists around the world have been marking down their GDP forecasts, and we now expect that the global economy entered recession in the third quarter. –Abiel Reinhart, J.P. Morgan The level of exports declined, a sign that weakness elsewhere in the world could be crimping demand for US exports. The growth rate of exports has been extremely rapid over the past several months, so this could just be payback for those very fast growth rates. But the timing, coinciding with measures of industrial demand in other countries turning down, is consistent with a slowdown in global demand. –Goldman Sachs

Compiled by Phil Izzo

Offer your reactions in the comments section.

Dig into an interactive summary of economists’ forecasts for the coming year from the latest WSJ.com survey.