PRINTMarket Update -- Economic Comment
February 5, 2008
We believe that today, Super Tuesday, will not only confirm the front runners for the Republican and Democratic candidates for President, but will also be a day where holdouts start to accept the notion that the U.S. economy is in a recession. For the last month, the economy has been teetering on the verge of a recession, but economic reports contained enough rays of hope to keep optimists believing that one could be avoided. Today's data, however, will cause even eternal optimists to see their glass as half empty. The January ISM survey of non-manufacturing industries revealed some worrying information: only three industries reported growth in January while 14 said business declined. The Non-Manufacturing Composite Index plunged to a recessionary 44.6 in January due to a 12.5 nosedive in the Business Activity Index to 41.9, a 10.4 plunge in the New Orders Index to 43.5, a 7.9 drop in the Employment Index to 43.9, and a 3.5 point decline in the Supplier Deliveries Index to 49.0. Readings below 50.0 are consistent with contracting activity. While we believe real GDP will contract this quarter for the first time since the third quarter of 2001, and we think further contraction is possible next quarter, we also believe a sharp rebound is in store for the following quarter. Policymakers on Capitol Hill and at the Federal Reserve are taking unprecedented action to limit the decline in economic activity, and it appears as though the third quarter of this year will be impacted the most. Indeed, we would not be surprised to see real GDP grow near a 4% rate in that quarter. The issue we are trying to work out now is will this rebound right the economy, or will there be insufficient ballast to keep it from capsizing again. We believe the economy will be able to stay afloat, but, staying with the nautical expressions, it is unclear how seaworthy it will be. The Fed, and possibly Capitol Hill, will have more repair work to do in the months ahead.
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