Reports Show a Ramped-Up Recession

O.K., we get it: The economy is bad. The Federal Reserve, in its Beige Book report released Mar. 4, said that "economic conditions deteriorated further" in the period surveyed from January through late February. Other reports released the same day continued the same recessionary drumbeat, with ADP's February survey of U.S. private employment showing a loss of 697,000 jobs on the month, while the Institute for Supply Management's nonmanufacturing index for February showed that the service sector remained firmly in contraction mode.

BusinessWeek compiled selected insights from Wall Street analysts and economists on the downbeat data—and other topics—on Mar. 4:

Action Economics The Fed's Beige Book reiterated that "economic conditions deteriorated further" since the reporting period from January through late February. That's consistent with the summary statements since October. Ten of the twelve Districts reported weaker conditions or declines in activity, with the exception of Philly and Chicago, that said their economies "remained weak." The deterioration was broad-based. And contacts don't look for a significant pickup before later this year or in early 2010. Consumer spending remained sluggish, though many Districts said conditions improved in the first two months of the year compared to the dismal holiday season. There were "pronounced" declines in manufacturing. Conditions also weakened "substantially" for extractors of natural resources due to the decline in global demand. Real estate markets remains largely stagnant with only minimal signs of stabilization in some areas, while demand for commercial real estate weakened "significantly."

There were further declines in business loan demand and a slight deterioration in credit quality for businesses and households. Upward price pressures were "very limited," while upward wage pressures eased in all Districts as a rising incidence of hiring freezes and ongoing job cuts increased the slack in the labor market.

Beth Ann Bovino, Standard & Poor's The U.S. ADP report [showed that] private payrolls plunged 697,000 in February, after a downwardly revised 614,000 drop in January (from -522,000). Jobs in the goods-producing sector fell 338,000, and are down for a 26th straight month. Manufacturing lost 219,000 jobs, a 36th consecutive monthly decline. Service producing jobs fell 359,000 from a 279,000 loss. Construction jobs fell 114,000, and have posted 25 straight monthly declines.

The data are worse than expected, to suggest downside risk to the Friday's payroll. We now expect 625,000 jobs to be lost in February.

Ted Wieseman, Morgan Stanley The composite nonmanufacturing ISM index fell to 41.6 in February from 42.9 in January, remaining deeply in recessionary territory, while continuing to hold somewhat above the all-time low of 37.4 hit in November. The business activity (40.2 vs. 44.2), orders (40.7 vs. 41.6), and supplier deliveries (48.0 vs. 51.5) gauges turned lower, while the employment index (37.3 vs. 34.4) rose but remained at a level consistent with continued severe job losses. Weakness by industry was very broadly based. Only one sector (entertainment) reported growth and 14 contracted. Problems obtaining credit were mentioned in the report as a significant issue in some sectors. The prices paid gauge rose to 48.1 from 42.5, with the recent rebound in gasoline prices noted.

Tony Crescenzi, Miller Tabak The Treasury yield curve continues to steepen, which has both good and bad connotations. The most important positive is that a steep yield curve typically precedes economic recoveries. Today the spread between 3-month T-bills and 10-year T-notes— the key empirical gauge used in forecasting models—is 273 basis points, a level that historically has indicated the chances of recession 12 months hence are very small. For example, in a study by Estrella and Mishkin, a yield spread of more than 121 basis points was associated with just a 5% chance of recession, which makes the current level comforting. Some of the recent steepening reflects the increase in Treasury supply, with the long end of the yield curve bearing the burden. This is the negative side. If the U.S. dollar were to fall, any steepening would take on an even larger negative connotation, but the dollar's decline would have to be significant to have meaningful impact.

The negative implication of a significant dollar drop and sharply steeper curve is the message it sends regarding the global appetite for U.S. assets. Any increase in the cost of capital in the U.S. would complicate efforts to battle the financial and economic crisis.

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