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Many economists and Fed officials have been forewarning a very negative fourth quarter. This is now a done deal with the release of the December jobs report which posted another monthly employment decline greater than half a million (somehow it is more sobering to put it in words rather than numbers). The December employment report paints a very bleak picture for the near term. At least the Fed’s latest FOMC minutes indicate that the Fed is well aware of the situation and is pulling out all the stops to boost the economy.
The burst in equities at the start of the year indeed was premature. This past week, equities had their worst week since November as traders and investors soaked in the fact that the recession is deeper than previously believed. Thus far, the fourth quarter is looking like the worst quarter of the contraction. Companies downgraded their outlooks and equities revalued to take this into account.
 Markets primarily focused on the Friday jobs report and President-elect Obama’s speech on his fiscal stimulus plan. Equities prepped for Friday’s employment losses on Wednesday with a deeply negative ADP employment report with stocks nose-diving for the day. Obama’s speech the next day was hoped to be heavy on cheerleading but instead turned out to be a dose of both hope and reality. Obama presented a broad picture of a massive stimulus plan but also stated that the worse is yet to come for the current recession. Stocks were mixed for the day after the president-elect’s comments on Thursday. Friday’s job losses were near expectations but many saw the detail as indicating that weakness is greater than believed – especially after numerous companies lowered revenue guidance.
Equities were down sharply this past week. The Dow was down 4.8 percent; the S&P 500, down 4.4 percent; the Nasdaq, down 3.7 percent; and the Russell 2000, down 4.8 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 2.0 percent; the S&P 500, down 1.4 percent; the Nasdaq, down 0.3 percent; and the Russell 2000, down 3.6 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 This week there is no point is muddying the waters with too much discussion of daily gyrations. Short yields are being depressed by heavy easing on the part of the Fed, by recessionary data including the negative jobs report, and by flight to safety. In contrast, the long bond yields are being boosted by longer term concerns over both heavy federal debt from the numerous bailout programs and fiscal stimulus plans and by inflation concerns. The moral of the story is beware that bond prices are likely heading down.
 For this past week Treasury rates were mixed as follows: 3-month T-bill, down 2 basis points, the 2-year note, down 11 basis points; the 5-year note, down 19 basis points; the 10-year bond, 3 basis points; and the 30-year bond, up 22 basis points.
Short-term rates have been held hostage by extreme easing by the Fed while longer yields are finally facing the facts that the federal deficit is ballooning. Additionally, concern is rising that the Fed will not be able to adequately reverse the sharp gains in money supply when needed to prevent rising inflationary pressures.
 This past week, oil prices responded to economic data the way most commodities do —sharply. The biggest factors were a larger-than-expected rise in inventories on Wednesday and a huge plummet in payroll jobs on Friday (along with the spike in the unemployment rate). As usual, commodities prices swing more than the overall economy and oil prices fell a sizeable $5.33 per barrel on Wednesday for spot West Texas Intermediate and by $2.20 per barrel on Friday. Recession is wreaking havoc on oil prices. The fact that prices are down despite Israeli military action in the Gaza Strip and the war of words (and supply) between Russia and the Ukraine on natural gas speaks volumes on the extent of global economic weakness.
Net for the week, spot prices for West Texas Intermediate dropped $6.09 per barrel to settle at $40.25 – and coming in $105.04 below the record settle of $145.29 per barrel set on July 3.
This past week, the big story was the plunge in December jobs. The recession clearly is getting worse based on employment, the unemployment rate, and other data. Some say that the fourth quarter will be the worst of the recession. But that does not mean we have turned the corner yet.
 The economy’s freefall into recession accelerated in the fourth quarter as reflected by the December jobs report and revisions to earlier employment numbers. The December employment report was dismal as nonfarm payroll employment plunged 524,000, following a drop of 584,000 in November and a fall of 423,000 in October. Payroll jobs have contracted every month in 2008 for a cumulative loss of 2.6 million this past year—the largest yearly drop since the end of World War II. The November and October figures were revised down a net 154,000.
 Employment cuts in December were felt across the board. The latest decline was led by the service-providing sector which lost 273,000 jobs. The largest job losses were seen in trade & transportation, down 121,000, and in professional & business services, down 113,000.
Goods-producing industries had 251,000 fewer jobs in December. Manufacturing and construction declined by 149,000 and 101,000, respectively. Natural resources & mining slipped 1,000.
Turning to wages, average hourly earnings rose 0.3 percent in December after gaining 0.4 percent in November. Wage gains are likely being kept a little high by the fact that average hourly earnings are not a fixed-weighted price index but one based on shifting components. During recession, the lower wage earners are typically cut first due to the cyclical sensitivity of low-wage retail trade and due to workers with fewer years experience often being cut first.
 Turning to the household survey, the civilian unemployment rate surged to 7.2 percent from 6.8 percent in November. Household Survey numbers underwent annual revisions with this report. The November unemployment rate had been originally estimated at 6.7 percent. December’s number is the highest since 7.3 percent for January 1993.
The December employment report shows the recession worsening. This is seen in the fact that job losses were much worse in the second half of 2008 than the first—1.7 million versus 0.9 million. This will keep the consumer sector very much in a defensive mode – which is not good news for the economy. The sharp job cuts will spill over into weaker or even negative income growth and then a further drop in consumer spending. The fourth quarter damage is still spreading.
 Heavy discounting and lower gasoline prices helped nudge up motor vehicle sales in December – but not as much as needed. Car and light truck sales were extremely weak in December but not quite as weak as November. Unit sales of North American made vehicles in December edged up to a 7.7 million annual rate, next only to November as the lowest rate in 20 years of records. The continued softness in sales reflects a declining jobs market, tight credit, and fears that U.S. automakers could still end up in bankruptcy. Overall, the year 2008 was quite ugly for U.S. producers. Year-ago totals were down as follows: General Motors, down 22.7 percent; Ford, down 20.5 percent; and Chrysler, down 30.0 percent. The sluggish sales pace has inventories still quite high – meaning automakers will be keeping assembly lines shut much longer than usual after holiday shutdowns.
 Tight credit indeed is crimping consumer spending – and not just for autos. Tighter lending standards, credit card companies and banks reducing credit limits, and consumers paying down balances led to a sharp drop in consumer credit outstanding in November. Consumer credit posted a record decline of $7.9 billion for November -- the third decline in four months. Revolving credit fell $2.8 billion, or 3.4 percent in the month, while nonrevolving credit fell $5.2 billion, or 3.9 percent. It is extremely unusual for outstanding credit to outright decline – as opposed to gains merely slowing. Even on a year-ago basis, credit growth has hit the brakes. The year-ago pace is down from a recent high of 5.8 percent for October 2007 to 2.3 percent for the latest month. The recent monthly declines point to how much the consumer sector has hunkered down which isn't going to help help the economy pick back up.
 The non-manufacturing sector continued to decline in December but not as rapidly in November. The ISM non-manufacturing composite index edged up a little over 3 points in December to 40.6. But this level is still well below the breakeven point of 50, indicating that many more purchasers are reporting contracting conditions than expanding conditions.
Weak demand is having a dramatic effect on prices. The prices paid index was little changed at 36.0 but still quite soft.
Looking ahead, orders improved but still remained deep in negative territory, indicating continued contraction in overall activity. The new orders index stood at 39.9 in December versus 35.4 the prior month, while backlogs came in at 42.5 versus 39.5 in November.
 Construction spending in November fell but not as much as feared. Construction outlays declined 0.6 percent in November, after dropping 0.4 percent in October. Weakness in the latest month was led by a sharp 4.2 percent decrease in private residential outlays. But the other two major components actually rose. Private nonresidential spending rose 0.7 percent while public outlays increased 1.4 percent in November.
On a year-on-year basis, overall construction outlays were down 3.3 percent in November. Overall, the latest construction outlays report shows housing continuing to deteriorate with public and nonresidential construction at least temporarily softening the housing blows on the economy. But the positives are not likely to last. Problems with retail sales and weak demand for office space suggest a weakening in nonresidential outlays while budget problems for states indicate a reduction in public outlays. However, fiscal stimulus could boost public outlays but not immediately. But for the near-term, construction is likely to worsen.
 The Fed minutes for the historic December 15-16, 2008 FOMC meeting show members in agreement over the need to lower rates in order to improve financial markets and to stimulate the economy. The main debate was over how the Fed should communicate and implement its near zero fed funds policy. Additionally, the Fed staff sharply lowered its forecast for economic growth in 2009. The minutes confirm that the Fed is going to hold rates low for some time and that the Fed’s attention will now focus on other measures of policy instead of mainly interest rates.
At the December FOMC meeting, the Fed made the historic policy move of cutting the fed funds target from 1 percent to a range of zero to 0.25 percent. The Fed is now easing further by buying various financial instruments, including mortgage backed securities (MBS). FOMC members agreed to not specify the timing of purchases MBS and to leave that to the discretion of the New York Fed which implements open market operations for the Fed. The purchase of MBS will depend on market conditions.
Not only did the Fed’s staff lower its economic growth forecast, but FOMC participants also anticipate negative growth in the near term.
"Participants expected economic activity to contract sharply in the fourth quarter of 2008 and in early 2009. Most projected that the economy would begin to recover slowly in the second half of 2009, aided by substantial monetary policy easing and by anticipated fiscal stimulus. "
This expected economic weakness led the Fed to cut its target rate and to move focus away from interest rates to other measures of monetary policy.
"Most participants judged that the benefits in terms of support for the overall economy of federal funds rates close to, but slightly above, zero probably outweighed the adverse effects. With the federal funds rate already trading at very low levels as a result of the large volume of excess reserves associated with the Federal Reserve's liquidity operations, participants agreed that the Committee would need to focus on other tools to impart additional monetary stimulus to the economy in the near term."
Along with this shift, the FOMC also decided to be more explicit about communicating policy – notably the fact that low rates are likely to continue for some time. Some members indicated that it also would be helpful to be more explicit about the Fed’s inflation expectations.
"Another possible form of communication that participants discussed was a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability. The added clarity in that regard might help forestall the development of expectations that inflation may decline below desired levels, and hence keep real interest rates low and support aggregate demand."
FOMC participants indicated that a number of the Fed’s new lending facilities will continue for some time and that others might be created.
The bottom line is that the economy still is in deep recession but the Fed is aggressively easing and beyond just what zero rates allow.
Indeed, there can be no doubt that the fourth quarter will be the worst of the recession so far. Unfortunately, even though monetary policy is as easy as it can get, we do not yet have signs of a turnaround. Fiscal stimulus is yet to come and the markets are only slowly unwinding the credit crunch. Negative growth – though likely less than the fourth quarter – is probably sticking around at least through the first half of this year.
This coming week is loaded with market moving indicators. Probably the two biggest are updates on the consumer sector with retail sales and on manufacturing with industrial production. We also get inflation updates with the PPI and CPI but inflation has taken a back seat to worrying over getting out of recession. Also on the market sites will be international trade. This indicator will give us an update on how export demand is holding up (or not) and whether businesses are cutting back on imports due to a drop in domestic demand.
The U.S. international trade gap in October widened to $57.2 billion from a $56.6 billion deficit in September. The latest widening in the trade deficit was led by the oil deficit which grew to $32.7 billion from $31.9 billion in September. The nonoil goods deficit actually shrank an incremental amount - to $35.6 billion from $35.7 billion in September. In the latest month, the disconcerting part of the report was another drop in exports. In October, exports declined 2.2 percent while the larger imports component slipped 1.3 percent. Looking ahead, we will see dueling softness in both exports and imports as demand is weakening in both the U.S. and overseas. But another drop in oil import prices is likely to result in at least a temporary shrinkage in the U.S. deficit. This month there is a larger than usual forecast range.
International trade balance Consensus Forecast for November 08: -$51.5 billion
Range: -$58.0 billion to -$39.0 billion
The U.S. Treasury monthly budget report showed that the deficit in November, inflated by TARP payments, totaled $164.4 billion. Now two months into the fiscal year, the year-to-date deficit is a whopping $401.6 billion. The Treasury's budget is a mess, offering a clear illustration of the great troubles facing the economy. The past offers little guidance for the near term future other than showing the depth of current problems. The month of December typically shows a moderate surplus for the month. Over the past 10 years, the average surplus for the month of December has been $13.8 billion and $7.5 billion over the past 5 years. However, TARP and other issues are likely to turn December 2008 into a sharp deficit.
Treasury Statement Consensus Forecast for December 08: -$83.0 billion
Range: -$150.0 billion to -$26.0 billion.
Retail sales are looking ugly at year end. Overall retail sales fell 1.8 percent in November, following a 2.9 percent record drop in October. Overall retail sales have fallen for five consecutive months. In the latest month, weakness was primarily in gasoline and motor vehicle sales which fell 14.7 percent and 2.8 percent, respectively. Excluding motor vehicles, retail sales dropped 1.6 percent in November, after a 2.4 percent pullback the previous month. Excluding motor vehicles and gasoline, retail sales in November made a partial rebound, rising 0.3 percent after slipping 0.7 percent the month before. Looking forward to December numbers, we may or may not see a modest gain in the headline number as a boost in auto sales is likely to be offset in part or more by non-auto sales. Chain store sales have been very disappointing recently and a drop in gasoline prices will likely tug down on service station sales.
Retail sales Consensus Forecast for December 08: -1.2 percent
Range: -2.1 to -0.3 percent
Retail sales excluding motor vehicles Consensus Forecast for December 08: -1.3 percent
Range: -2.6 to -0.4 percent
Import prices in November fell 6.7 percent after dropping 5.6 percent in October. However, the worst weakness was tied to commodities prices – which are very sensitive to both changes in demand and supply. Nonetheless, the latest decline was a record monthly decline for the series. Another record was the month-to-month decrease in import prices excluding petroleum, down 1.8 percent after a 0.9 percent dip in October. We will likely see another decline in import prices in December on lower oil and other commodity prices. But with weakening demand, consumer and capital goods prices could also dip.
Import prices Consensus Forecast for December 08: -5.3 percent
Range: -8.5 to -2.1 percent
Business inventories have been declining but not fast enough. Business inventories fell 0.6 percent in October after a 0.4 percent decline in September. However, business sales plunged 3.5 percent in the latest month, resulting in a jump in the inventory-to-sales ratio to 1.34 from 1.30 in September. This ratio is at its highest since 1.35 for June 2003 when businesses, in contrast, were building inventories with the expectation of heavier demand.
Business inventories Consensus Forecast for November 08: -0.5 percent
Range: -2.4 to 0.0 percent
The producer price index continued to soften in November, largely on lower energy cost as the overall PPI dropped 2.2 percent, following a 2.8 percent fall in October. The core PPI rate eased to a 0.1 percent gain after jumping 0.4 percent in October. Dragging the headline number down was a monthly 11.2 percent drop in energy costs. Within energy, gasoline plummeted 25.7 percent after a 24.9 percent fall in October.
PPI Consensus Forecast for December 08, m/m: -2.0 percent
Range: -2.9 to -0.7 percent
PPI ex food & energy Consensus Forecast for December 08, m/m: +0.1 percent
Range: -0.3 to +0.4 percent
The Empire State manufacturing index remained deep in contraction mode in December although this index was little changed at minus 25.8. Weak demand for output has led to a plunge in price readings. The prices paid index fell nearly 30 points to minus 7.5 while prices received declined more than 20 points to minus 11.7. The orders picture was not favorable for production in the near term as the new orders index came in at minus 20.8 and backlogs were at negative 27.7.
Empire State Manufacturing Survey Consensus Forecast for January 08: -25.0
Range: -28.0 to -20.0
Initial jobless claims for the week ending January 3 unexpectedly fell a steep 24,000 to 467,000. The decline may be due to the holiday shortened week but the Labor Department said there are no special factors. In contrast, continuing claims continued to swell, jumping 101,000 to 4.611 million for the worst level since 1982. The latest change in continuing claims is likely more reflective of current conditions in the labor market than initial claims. While those filing initial claims may or may not have been affected by the New Year’s holiday than usual, it is clear that laid off workers are having a harder time getting back on a payroll.
Jobless Claims Consensus Forecast for 1/10/09: 500,000
Range: 442,000 to 700,000
The general business conditions component of the Philadelphia Fed's business outlook survey index remained sharply negative in December – but not quite as severely as in November. The Philly Fed’s general business conditions index pulled up somewhat to minus 32.9 from minus 39.3 in November. But contraction has been significant as this index has been at very negative levels for three months. New orders point to further weakness ahead as this index came in at minus 25.2. The unfilled orders index also remained significantly negative. Price pressures eased further as the prices paid index fell to minus 33.2 from minus 30.7 in November. Also, prices received dropped sharply to minus 37.8 from minus 15.5 the month before.
Philadelphia Fed survey Consensus Forecast for January 09: -35.0
Range: -41.3 to -23.7
The consumer price index in November fell for the fourth month in row due to lower energy costs. The headline CPI dropped 1.7 percent in November, following a 1.0 percent decrease in October. September is reported as no change but before rounding the CPI edged down incrementally. Meanwhile, the core rate in November was unchanged and followed a 0.1 percent outright decline in October. Keeping the core rate soft were declines in lodging while away from home, new and used vehicles, and in public transportation (which includes airline fares). For the latest month, energy fell a monthly 17.0 percent, pulled down by a 29.5 percent plunge in gasoline prices.
CPI Consensus Forecast for December 08, m/m: -0.9 percent
Range: -1.5 to -0.4 percent
CPI Consensus Forecast for December 08, y/y: -0.2 percent
Range: -0.8 to +0.2 percent
CPI ex food & energy Consensus Forecast for December 08, m/m: +0.1 percent
Range: -0.1 to +0.2 percent
CPI ex food & energy Consensus Forecast for December 08, y/y: +1.9 percent
Range: +1.7 to +1.9 percent
Industrial production in November resumed its strong downtrend after a technical rebound in October. Overall industrial production in November fell 0.6 percent, following a 1.5 percent rebound in October. The rebound in October was due to oil and chemical facilities coming back online after Hurricanes Gustav and Ike. In November, the all-important manufacturing component dropped 1.4 percent after a 0.6 percent partial rebound the month before. Within manufacturing, declines were widespread. Overall capacity utilization in November dropped to 75.4 percent from 76.0 percent in October and came in lower than the consensus forecast for 75.7 percent. Looking ahead, manufacturing output is likely to be ugly in January as manufacturing production hours plummeted a monthly 2.4 percent for the month, according to the employment situation report.
Industrial production Consensus Forecast for December: -1.0 percent
Range: -2.0 to -0.2 percent
Capacity utilization Consensus Forecast for December 08: 74.6 percent
Range: 73.2 to 75.2 percent
The Reuter's/University of Michigan's Consumer sentiment index in December edged 1 point higher to 60.1, reflecting slight improvement in the expectations component. Levels, however, are still extremely depressed. The positive numbers is that inflation expectations have been trending down. For December, 1-year inflation expectations held steady at a low 1.7 percent while 5-year expectations eased a bit lower to 2.6 percent.
Consumer sentiment Consensus Forecast for preliminary January 09: 59.0
Range: 54.0 to 62.0
Econoday Senior Writer Mark Pender contributed to this article.
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