Eurozone economy contracts, Bernanke says US may follow

The eurozone economy is not looking in good shape. From Bloomberg:

Europe's manufacturing and service industries contracted at the fastest pace in almost seven years in September as the credit-market seizure intensified and companies scaled back production in response to slowing orders.

Royal Bank of Scotland Group Plc's composite index dropped to 47, the lowest since November 2001, from 48.2 in August. Economists had forecast a decline to 47.8, according to the median of 21 estimates in a Bloomberg News survey...

Markit's manufacturing index fell to 45.3 this month from 47.6 in August, below economists' forecasts, while the services index fell to 48.2 from 48.5...

A separate report today showed industrial orders in the euro area rose 1 percent in July from the previous month and were up 1.6 percent from a year earlier. Excluding the volatile transport category, orders fell 1.4 percent on the month and dropped 2.1 percent over the year.

With the Treasury's bailout plan not getting a smooth ride in Congress, the US economy also faces possible contraction. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will shrink if markets don't begin functioning normally, joining Treasury Secretary Henry Paulson in urging skeptical lawmakers to quickly pass a $700 billion rescue for financial institutions.

"I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover," Bernanke told the Senate Banking Committee today. "My interest is solely for the strength and recovery of the U.S. economy."

Lawmakers have balked at rubber-stamping the Treasury plan to remove illiquid assets from the banking system, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans resisting the plan's reach and size.