The first week of January was not only full of college football games, but also provided a sizable menu of economic news. With a lot of negative reports and weakening confidence levels, the “r” word (recession) has surfaced more frequently. Some analysts have put the probability of the U.S. economy entering one within the next year as high as 50%. While NEMA/BIS maintains that recession is unlikely at this point, due in part to the healthy condition of corporate balance sheets and global trade conditions, enough problems exist to raise the alarm.

 

Even the Fed’s Open Market Committee minutes from their December meeting reflected deep-seated concerns, particularly about the housing market slump and resulting credit crunch. Policymakers voiced concern that consumer spending could be jeopardized by higher fuel prices, tighter credit and the downturn in housing prices. Inflation seems to be bothering them less, but again, they appear tuned to the inflation-inducing potential of higher energy and commodity prices and rising import prices vis-à-vis the weak dollar.

 

In terms of real numbers, the Fed’s worries about the housing market were confirmed with existing sales of single-family homes showing a 20 percent decline from the prior year. Total construction spending edged slightly higher thanks to solid gains in the nonresidential and public sectors, but this was tempered by the 2.5 percent drop in residential spending. This morning’s employment report offered up more evidence of the housing market’s struggles as December 2007 construction payrolls tumbled by nearly 50,000 and payrolls at financial services firms have contracted by nearly 25,000 in the past three months.

Closer to home for manufacturers, news has not been quite as bad in recent months; however, the ISM index fell to 47.7—its lowest since 2003—due to weak readings on new orders, production and employment. Even what appeared to be a positive reading for factory orders turned out to be more downbeat, since details of the release showed a key indicator of near-term business investment activity fell two months in a row.


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