By William Patalon III
Executive Editor
Money Morning/Money Map Report
When the Labor Department releases February’s U.S. employment numbers on Friday, economists are expecting to see the largest one-month job loss in nearly 60 years. With consumer spending in a freefall and factory output continuing to plunge, U.S. companies are idling plants, slashing extra workers and cutting back on the hours of those that remain, MarketWatch.com reported.
"Pink slips continue to fly," said Meny Grauman, an economist for CIBC World Markets (CM).
The first week of the new month (March) brings two of the most important economic indicators: The ISM index and the nonfarm payrolls report. Both are expected to be quite grim.
The ISM Index is a monthly composite index released by the Institute for Supply Management that is based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area. The index is particularly timely, since it’s released on the first business day of the month and covers the previous month’s data.
If the index is above 50, it indicates that the economy is expanding. Values below 50 indicate a contraction.
Bear in mind, in January, the unemployment rate soared to 7.6% and 600,000 jobs were lost from the economy,
Economists expect payrolls to plunge 630,000 in February, slightly more then the 598,000 lost in January and the 597,000 lost in November. The unemployment rate is expected to climb to 7.9% from 7.6%, breaking through the 7.8% peak in the 1991 recession to the highest level since 1984.
It would mean that a record 4.2 million jobs will have been lost since the recession began in December 2007.
And there’s no end in sight.
"Employment losses have deepened considerably in recent months," wrote economists for Wachovia Corp. (WB), who expect total losses for the recession to top 6.5 million. "With total revenue declining at its worst pace since the late 1950s, many businesses and governments are in survival mode and have no choice but to cut jobs."
If Wachovia economists are right that 6.5 million will lose their jobs by the end, employment will have fallen by 4.7% in this recession, which started in December 2007.
The big jump in unemployment benefits has been the main evidence for a worsening job market. First-time claims have risen over 600,000, nearly double the level at the beginning of the recession. Continuing claims are at an all-time high. Surveys show there is extreme consumer pessimism about finding a job.
While some forecasters think job losses in February stayed in the area of about 590,000, a few economists actually think the labor market got much worse in February and are expecting losses of 650,000, 700,000, or even 800,000.
The report is "likely to be the weakest to date," wrote economists for Barclays Capital (ADR: BCS), who projected payroll losses of 675,000 and an unemployment rate of 8%.
If job losses did reach 630,000 in February, as expected, it would be the third-largest monthly loss on record, dating back to 1939. The record was set in September 1945, when nearly 2 million people lost their jobs after the U.S.-led Allies won the most destructive war in history and American industry was transitioning from wartime to peacetime. Then, in October 1949, 834,000 jobs were lost when almost all the nation's steelworkers went on strike in the final month of a short-but-brutal recession.
Another strike in July 1956 resulted in 629,000 lost jobs, but the next month the economy bounced back and 678,000 jobs were regained.
The work force is much larger today than it was in 1949 or 1956. If 630,000 jobs were lost in February, it would bring total losses in this recession to slightly more than 3% of payrolls, close to the 3.1% lost in the recessions of 1982, 1954 and 1949 (excluding the strike). Next on the list: 4% in 1958 and 6.9% in 1945.
Market Matters
In his first address to Congress last Tuesday night, U.S. President Barack Obama tried to find the middle ground between fear and optimism as he outlined the severe global economic challenges being faced today, while vowing to lead the nation into recovery.
While the talk was “generally” well-received (at least, by his fans), President Obama followed up with a budget blueprint (rather a national healthcare plan) that proposed some significant tax hikes on upper-income folks and on many businesses. Early prognostications claim that Big Oil and Big Pharma will be particularly hard hit, though Congress will have some say in the ultimate spending and tax moves. Then again, with the budget quickly ballooning to unfathomable levels, here’s hoping Obama can meet his ambitious goal of halving the deficit within five years.
Financial institutions were in the news again, as the Federal Deposit Insurance Corp. (FDIC) reported that domestic banks lost more than $26 billion in the fourth quarter and more than doubled their loan loss reserves from the prior year. JP Morgan Chase & Co. (JPM) slashed its dividend by almost 90% to 5 cents a share and announced cutbacks of 12,000 jobs as it incorporates Washington Mutual into its mix. Fannie Mae (FNM) reported a $25 billion quarterly loss and has its hands out for another government handout. Likewise, American International Group Inc. (AIG) signaled a need for more bailout funds as it contemplates breaking itself into four separate entities: Asian ops, international life insurance, U.S. insurance, toxic assets (any interested parties for this unit?). Citigroup Inc. (C) took a step closer to nationalization as the government and some private investors agreed to convert preferred stock into common stock, leaving taxpayers with a stake of just under 40% in the one-time financial behemoth.
Meanwhile, the government announced some details of “stress tests” that will be used to measure how banks needing additional capital assistance would hold up during “baseline” and “extreme” economic conditions.
In other corporate news, the tech sector is officially out of favor as two consulting firms downwardly revised sales forecasts on expectations that consumers and businesses will resist any major expenditures in the dire economy. Microsoft Inc. (MSFT) issued a poor outlook for the rest of the year, but hinted that another deal for Yahoo! Inc. (YHOO) may be in the works. Dell Inc. (DELL) reported a dismal quarter on slumping sales, as revenue came in below expectations.
Traders welcomed news that shrinking crude-oil supplies (due to cuts by the Organization of the Petroleum Exporting Countries [OPEC]) may be reaching equilibrium, thanks to lower demand due to the slow economy and oil prices expected to climb above the $44-a-barrel level.
Worries of a U.S. “Lost Decade” – which Money Morning warned investors about all the way back in July – hit Wall Street as equity indexes fell to their lowest levels in 12 years amid concerns that the recession will get much worse before it gets better.
February was the worst month for the Dow Jones Industrial Average since 1933. While U.S. Federal Reserve Chairman Ben S. Bernanke attempted to calm the markets with optimistic rhetoric that the downturn might end this year, investors did not find his message very convincing. Every slight rebound was short-lived, as investors tried to make heads or tails about Citi’s ongoing concerns, President Obama’s budget, and the horrid economic data (see below). So much for those 60-odd standing ovations the nation’s new president received during his speech to the joint session of Congress.
| Market/ Index |
Year Close (2008) |
Qtr Close (12/31/08) |
Previous Week |
Current Week |
YTD Change |
| Dow Jones Industrial |
8,776.39 |
8,776.39 |
7,365.67 |
7,062.93 |
-19.52% |
| NASDAQ |
1,577.03 |
1,577.03 |
1,441.23 |
1,377.84 |
-12.63% |
| S&P 500 |
903.25 |
903.25 |
770.05 |
735.09 |
-18.62% |
| Russell 2000 |
499.45 |
499.45 |
410.96 |
389.02 |
-22.11% |
| Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
| 10 yr Treasury (Yield) |
2.24% |
2.24% |
2.77% |
3.04% |
+80 bps |
Economically Speaking
With Obama stealing much of the limelight, Fed Chair Bernanke attempted to insert himself into the latest debate by issuing a few key policy talks of his own. He told Congress that the recession should end in 2009 and next year should be one of recovery (of course, he also mentioned some substantial risks to his forecasts). Bernanke then tried to quell the ongoing bank rumors by claiming that “nationalization misses the point” and such moves “would be disruptive to the markets.” Finally, he attempted to calm the growing concerns that the exploding deficit and expanding money supply will lead to skyrocketing inflation in the years to come. Bernanke remains confident that the Fed can act quickly to avoid any significant threats of price pressures when the recovery eventually emerges.
When the government initially reported that U.S. gross domestic product (GDP) contracted by 3.8% in the fourth quarter, some economists raised eyebrows and predicted a revision in the later releases. And a revision is what they got. Now the Commerce Department claims that the American economy shrank by 6.2% in the last quarter of 2008, the worst setback since 1982, and a far weaker showing that anyone expected.
Elsewhere, existing home sales plummeted to their lowest level in almost 12 years, and new home sales plunged to their worst showing ever reported. Consumer confidence also experienced a record-setting down month in January, as individuals remained fearful for their jobs and hesitant to hit the malls – or even the Wal-Mart Stores Inc. (WMT) for anything, but the bare essentials.
Weekly Economic Calendar
| Date | Release | Comments |
| February 24 | Consumer Confidence (02/09) | Worst showing on record (1967) |
| February 25 | Existing Home Sales (01/09) | Dropped to 12-year low |
| February 26 | Durable Goods Orders (01/09) | Lower than expected decline |
| Initial Jobless Claims (02/21/09) | Total claims surge past the 5 million level | |
| New Home Sales (01/09) | Worst level ever reported (1963) | |
| February 27 | GDP – 4th quarter | Revisions mark worst showing since 1982 |
| The Week Ahead | ||
| March 2 | Personal Income/Spending (01/09) | |
| Construction Spending (01/09) | ||
| ISM Index – Manu (02/09) | ||
| March 3 | ISM Index – Services (02/09) | |
| Fed Beige Book | ||
| March 4 | Initial Jobless Claims (02/28/09) | |
| Factory Orders (01/09) | ||
| March 5 | Unemployment Rate (02/09) | |
| Nonfarm Payroll (02/09) | ||
| Consumer Credit (01/09) |
News and Related Story Links:
-
Money Morning News Analysis:
The Three Missteps in President Obama’s Economic Turnaround Plan. -
Money Morning News Analysis:
By Ignoring the Treasury Secretary’s Advice, Did WaMu Make the Worst Possible Deal for Itself? - Money Morning News Analysis:Three Reasons Bank Nationalization Will Keep Investors Awake at Night.
- Money Morning Special Investment Research Report (Part I of II):The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery - And How to Play it.
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Money Morning Special Investment Research Report (Part II of II):
The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery - And How to Play it for Profit.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.