Those making the case that America’s economic free fall will not reach well into 2008 will find the going more difficult after a number of unexpectedly weak economic signals released yesterday sent shock waves through the markets.

Matters were not helped by the Federal Reserve chairman’s congressional testimony. Ben Bernanke’s message to Congress was dire: The economy needs all the help it can get.

Mr. Bernanke, whose job it is to temper America’s economic cycles through monetary policy, admitted to the House Budget Committee that the Fed alone may not be able to avert a serious economic downturn. He said a prompt and “explicitly temporary” fiscal stimulus package from Congress could supplement the Fed’s own efforts to prevent recession.

Among the poor economic news, the Philadelphia Federal Reserve Bank reported that manufacturing activity in the Philadelphia region slowed to a six-year low in January, and the U.S. Census Bureau said December’s overall housing starts were the fewest in 17 years. The numbers startled traders, who sent stocks and the dollar sharply down. The Dow Jones Industrial average plummeted 306.95 points, or 2.5%, to 12,159.21, its biggest fall in two months. The dollar fell to a 2 1/2-year low against the yen.

The chief economist at High Frequency Economics, Ian Shepherdson, called the reports “really grim,” noting that the Philadelphia Federal Reserve Bank’s general economic index plunged to levels seen only during recessions.

“This is very alarming, because we had pinned our hopes on the relative strength of the corporate sector offsetting some of the housing hit. This is bad,” he said.

“Both key reports pointed towards profound weakness for the economy for the first part of this year,” the chief economist at Nomura Securities, David Resler, said. “I think the markets are still coming to grips with the implications of a very weak economy.”

According to Bloomberg News, President Bush is close to completing a fiscal stimulus proposal that would include $800 in rebates for individuals, $1,600 for households, and tax breaks for business.

The plan would also include a temporary elimination of the bottom tax rate, which is now 10%, and a lump-sum rebate to all taxpayers, Bloomberg News reported.

Under the new plan, businesses would be allowed to deduct 50% of the price of any new equipment they purchase this year. Small business would be able to deduct as much as $200,000 in new equipment purchases, up from the current $112,000 limit.

The proposal may be further revised as administration officials consult with both Democratic and Republican lawmakers, according to the Bloomberg report.

Although support for such a stimulus plan was fairly broad in Washington yesterday, economists were not impressed by the idea.

“Historically, these fiscal stimulus packages have always come too late,” an economist at the Ludwig von Mises Institute, Mark Thornton, said. “You experience all of the recession and then the fiscal stimulus kicks in when the economy is already recovering, and then it creates enhanced inflation pressures.”

Also yesterday, the House Republican leader, Rep. John Boehner of Ohio, floated a $150 billion stimulus package. However, even if Congress agreed to support it, “the overall effect on our $14 trillion dollar economy would amount to little more than a rounding error,” the director of government affairs at the Reason Institution, Michael Flynn, said. “It would be like finding a penny and thinking you’ve won the lottery.”

The office of the New York State comptroller released similarly gloomy news yesterday, reporting that Wall Street bonuses declined 4.7% in 2007, to an average of $180,420.

“The future is not so bright,” Comptroller Thomas DiNapoli said in a statement. “The losses sustained in the securities industry during the second half of 2007 are a fairly clear indicator that tax collections, especially from business taxes, will erode in 2008.”

According to the report, the seven largest financial firms lost a total of $28 billion in profits during the second half of 2007.

One of the firms, Merrill Lynch, posted a $9.8 billion fourth-quarter loss yesterday, and wrote down $14.6 billion in bad mortgage debt. Both of the figures were much larger than Wall Street analysts had expected.

Merrill’s recently appointed chief executive officer, John Thain, called the results “unacceptable.” Mr. Thain would not say that the worst of the credit crisis was over.

“I think there are certainly more losses coming in the financial sector as a whole,” a senior fellow at the Brookings Institution, Douglas Elmendorf, said.

Merrill’s report followed on the heels of losses posted by Citigroup Inc., Morgan Stanley, and Bear Stearns Companies Inc. Citigroup, the nation’s largest bank by assets, reported a fourth quarter quarterly loss of almost $10 billion on Tuesday, the largest in its 196-year history.

Economists at Goldman Sachs Group Inc., Merrill Lynch, and Morgan Stanley all said this week that America is probably sliding into a recession.

Many economists doubt that Mr. Bernanke will be able to have much of an effect on the economy using interest rate cuts, as traders already assume that the Fed will cut rates and are pricing their assets accordingly.

“Even if the Fed drops interest rates by 50 basis points next week, that’s already probably priced into the market, so I don’t know if that will even do anything,” Mr. Flynn said.

The two leading Democratic presidential candidates, senators Clinton and Obama, are backing fiscal stimulus plans in an attempt to bolster the effectiveness of Mr. Bernanke’s monetary policy moves. Ms. Clinton increased the size of her proposed stimulus plan to $110 billion from $70 billion because of signs of further weakness in the economy, according to a press release yesterday.

“Stimulus packages are politically attractive because they appeal to our sense of metaphor: The economy is an engine, it needs more gas; the economy is a patient, it needs an injection,” a professor of economics at George Mason University, Russell Roberts, said.

According to Mr. Roberts, the measures would likely amount to little more than “window dressing to make people think the politicians will think about them.” Besides, “money doesn’t come out of thin air,” he said.

“As soon as there’s a hint of economic challenges, everyone starts channeling their inner Keynesian. It’s like they start thinking, ‘We just need one more trip to the mall to get us through this cycle.’ That’s not how tax policy should work: Japan tried it for a decade and it failed,” Mr. Flynn said.

According to Michael Cosgrove, the principal for Econoclast, a Dallas-based economic research firm, the only proposal on the legislative table that could have a positive effect on the economy is likely to be halted by partisan bickering.

“What they need to do is make the income rate cuts that are already in place permanent,” he said. Doing so would remove a significant amount of economic uncertainty that bogs down the economy, he said.

“I don’t think Congress will make the cuts permanent, though,” Mr. Cosgrove said. “Especially not if we have a Democratic Congress and a Democratic president.”