The "R" word is taboo no more.
Everyone from Warren Buffett of Berkshire Hathaway Inc. (BRK.A, BRK.B) to PIMCO's Bill Gross has invoked the once-verboten term. And while it'll be many months before we know if we're actually in a recession, a fresh batch of worrisome economic statistics released last week certainly heighten the possibility.
But it was the disappointing jobs report released Friday that might have kicked the last leg out from under the last argument that the United States would be able to skirt a recession. We won't be able to escape it without a strong labor market to fuel consumer spending and the employment situation is anything but strong.
Let's take a look at the economic reports released in the past week:
Construction Spending Clipped: Last Monday, the U.S. Census Bureau announced that construction spending for January decreased to a seasonally adjusted rate of $1.1 trillion, a 1.7% decrease from the revised December figure and a 3.3% decrease from January 2007. The bulk of the decline came from personal – not private – construction, as housing inventory continues to remain at a historic high, dampening down demand for new home construction.
Manufacturing Meltdown: Also on Monday, the Institute for Supply Management (ISM) released its February 2008 manufacturing report. The Purchasing Managers' Index (PMI) fell to 48.3 from January's 50.7 level. A reading below 50 indicates a contraction in the manufacturing industry, which isn't surprising when you consider the next indicator to be released.
Factory Orders Flagging: On Wednesday, the U.S. Census Bureau was back to announce its preliminary report on manufacturer's shipments, inventories and orders for January. New orders decreased by 2.5% from December, while inventories increased by 1.3%. A lack of new orders is pushing up inventories [and storage costs] and goes hand in hand with the slowing in the manufacturing industry indicated by the ISM report.
Service Activity Spikes: The ISM also released its February 2008 non-manufacturing index (NMI) report, commonly referred to as its services report. NMI increased 4.7 points to reach 49.3. While it's an increase, just as with the PMI, a reading under 50 indicates a contraction.
Beige Book Sings the Blues: The U.S. Federal Reserve released its highly anticipated Beige Book report this week. The report, which is published eight times per year, compiles information from the across the 12 Fed districts and summarizes content from business and contacts outside of the Federal Reserve. It's not intended to reflect the official position of the Board of Governors, but it is a good anecdotal snapshot of current business conditions. Two-thirds of the districts reported a contraction in business activity, while the remaining third noted "subdued, slow or modest" growth. There was good news from the agriculture and energy sectors, however the financial sectors reported tightening credit standards and a weakening in loan demand.
Jobless Claims Shrink: For the week ending March 1, the Department of Labor announced a decrease of 24,000 in first-time jobless claims to 351,000 from last week's figure of 375,000. The four-week moving average, which smoothes out weekly volatility, also decreased 1,500 to 359,500 from the previous week's figure of 361,000.
Unemployment Unchanged: On Friday, the Bureau of Labor Statistics released its Employment Situation Summary for February. The unemployment rate was essentially unchanged at 4.8%, a 0.1% decline from January. On the surface, it seems like good news. But when you dig a little deeper, you find that people are giving up and no longer looking for work. The BLS only considers active jobseekers, so a decline in the unemployment rate can be misleading.
Payrolls Pared: As part of the same report, the BLS announced that non-farm payrolls declined by 63,000 jobs. Employment fell in manufacturing, construction, and retail trade, while the health care and food services industries had growth. It was the biggest decline in jobs since 2003 and it was in sharp contrast to economist expectations of 23,000 jobs added. It's possible this number will later be revised, but for now it was enough to send world markets tumbling.
Consumer Credit Charges Ahead: Also on Friday, the Federal Reserve announced consumer credit increased at an annual rate of 4.5% in the fourth quarter of 2007 and at 5.5% for the full year. For the month of December, consumer credit increased at a 2% annual rate. This report measures both revolving credit, such as credit cards, as well as non-revolving credit used to finance education, autos or vacations. This report does not consider mortgages or other real estate-secured loans.
And remember that the vast majority of these signs are lagging indicators, meaning the data will only signal a recession after it has already begun, which means we could easily be in recession right now.
U.S. gross domestic product (GDP) must register negative growth for two consecutive quarters before we can make the official call on whether the U.S. economy is in recession. But with the labor markets softening, the odds of a significant slowdown continue to increase. High energy and food costs are forcing consumers to rack up debt just to buy necessities while they worry about the plummeting value of their homes, which for most of them is their biggest asset. It is doubtful the U.S. consumer will be able to spend enough to keep the U.S. economy from continuing to contract, even with a check from the U.S. government.
It certainly looks like a recession is coming, if it's not already here.
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