It’s just seems to not go away. For all the fixes that the Treasury and Fed have come out with over the past year, new revelations about losses by financial firms continue—with this past week’s headline being a record loss by AIG. Not surprisingly, stocks tanked – but with other help along the way.
 Equities plunged to new lows not seen since 1997 for many indexes. Worries about the financial sector and the economy in general pushed stocks down sharply for the week. The biggest concern was the financial sector as AIG announced on Monday the largest quarterly loss in U.S. history. This tugged downward on many financial stocks, including Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs, JPMorgan Chase, and Citigroup. But it just kept getting worse at the start of the week despite another bailout plan from the Treasury for AIG—which actually made markets more nervous than calm. Warren Buffet sent out his chairman’s letter on Berkshire Hathaway’s first annual loss in years. His comment that the economy is in “shambles” for the year added to market pessimism. And finally, GE cut its dividend by 68 percent.
There was a short-lived rally on Wednesday as Chinese officials indicated that Premier Wen Jiabao would be announcing a new stimulus plan the next day. Investors saw the pending move as getting Asian economies moving. When that did not happen on Thursday, momentum turned back down.
On Thursday, the bear market resumed as the Nasdaq dropped to a six-year low and both the Dow and S&P 500 hit 12-year lows. Lack of positive news from China got stocks headed back down. Also knocking stocks down for the day were comments from GM that it would likely not survive without additional help from the federal government.
Despite dreary employment numbers for February, most indexes (but not the Nasdaq) posted a modest rally at week end—largely on bargain hunting. Job losses had been in line with expectations.
Nonetheless, there was a lot of bleeding on Wall Street—especially for financials. Many bank stocks just for the week fell 20 to 30 percent.
The Dow and S&P 500 ended the week down 53.2 percent and 56.3 percent, respectively, from all-time highs hit in October 2007.
Equities were down this past week. The Dow was down 6.2 percent; the S&P 500, down 7.0 percent; the Nasdaq, down 6.1 percent; and the Russell 2000, down 9.8 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 24.5 percent; the S&P 500, down 24.3 percent; the Nasdaq, down 18.0 percent; and the Russell 2000, down 9.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
Treasury yields fell this past week out of fears for the worst in the stock market. Rates dropped the most on Monday and Thursday – the days that equities fell the most during the week. Bond traders are caught up in the same emotional cross currents that have picked up since Congress and the new Administration have been pushing fiscal stimulus and budget plans that result in ballooning deficits. Yes, the economy is considerably anemic currently and should be considered a plus for bond prices. But the shadow of massive federal deficits for years to come has grown longer and darker and has bond traders concerned. But this past week, flight to safety won out over long-term concerns as rates eased across the yield curve.
 Economic data were quite negative during the week but mostly near expectations, having little direct impact on yields. Company news played bigger roles—notably AIG’s losses, GM’s warnings of failure, and Berkshire Hathaway’s Warren Buffet scaring investors to the safety of Treasuries. The short end also benefitted from 50 basis point rate cuts in target rates by the Bank of England and by the European Central Bank.
For this past week Treasury rates were down as follows: 3-month T-bill, down 6 basis points, the 2-year note, down 5 basis points; the 5-year note, down 13 basis points; the 10-year bond, down 16 basis points; and the 30-year bond, down 17 basis points.
Once again, flight to safety nudged rates lower this past week.
 Oil prices were little changed net for the week as dueling cross currents evened out over the week. Oil prices and stock prices marched almost in lockstep this past week, reacting to much the same news on the health of the economy. News of AIG’s massive losses and Warren Buffet’s economic commentary pushed spot prices for West Texas Intermediate down early in the week with a negative ISM manufacturing report also coming into play. Prices firmed on Tuesday and especially Wednesday on chatter that OPEC would be making further cuts in production. Reports that China would be creating additional stimulus plans also boosted oil at mid-week. Lower than expected stockpiles of crude also bumped prices up. But prices fell again on Thursday on comments by GM officials they the company was close to failure without government help. China’s retreat on additional stimulus also pulled the rug out from under crude.
Net for the week, spot prices for West Texas Intermediate edged up 76 cents per barrel to settle at $45.52 – and coming in $99.77 below the record settle of $145.29 per barrel set on July 3.
The latest data continue to indicate that the recession has grown deeper in the first quarter, compared to the fourth. Job losses have been massive just for the first two months of 2009, not to mention since the recession began.
 There are no signs of improvement in the labor markets. In fact, unemployment is getting much worse than expected. Nonfarm payroll employment in February plunged 651,000, following a decline of 655,000 in January and a fall of 681,000 in December. But the bad news can really be seen with the downward revisions to the prior two months. January was revised down 57,000 and December was bumped down 104,000 for down a net 161,000.
Just for the first two months of 2009, payroll jobs have fallen by 1.3 million. Going back to January 2008 when the recession started, 4.4 million payroll jobs have been shed on a net basis.
 Job cuts in February were widespread. The latest decline was led by the service-providing sector which shed 375,000 jobs. In this sector, the largest job losses were seen in professional & business services, down 180,000, and in trade & transportation, down 124,000. The goods-producing sector also continued its downtrend, falling 276,000. Manufacturing and construction declined by 168,000 and 104,000, respectively. Natural resources & mining decreased 4,000. Looking at wage inflation, average hourly earnings rose 0.2 percent in February, matching January’s gain.
From the household survey, the civilian unemployment rate surged further to 8.1 percent from 7.6 percent in January. The unemployment rate is at its highest in 25 years—since 8.3 percent seen for December 1982.
Today’s employment report shows a very bleak labor sector and points to further retrenchment in personal income and consumer spending. The dollar was weakened against all major currencies. There is likely to be negative impact on equities—look for flight to quality in bonds.
 Frequently, the productivity report provides a lot of noise in terms of what is going on for trends in productivity and labor costs. There can be significant quarterly movements in the components of both productivity and unit labor costs. But the latest report provides strong hints that businesses need to and will engage in significant job cutting.
Productivity and labor costs in the fourth quarter were revised sharply—and for the worse. Fourth quarter productivity actually was revised to a decline of 0.4 percent annualized, compared to the initial estimate of 3.2 percent. Meanwhile, unit labor costs were jacked up to 5.7 from an initial estimate of a 1.8 percent annualized increase.
Year-on-year, productivity was unchanged at 2.2 percent in the fourth quarter. Year-on-year, unit labor costs firmed to up 1.8 percent from up 1.6 percent for the third quarter.
The latest productivity and costs report reflects dueling cuts in output and labor costs as businesses are trying to keep costs down as demand continues to drop. Companies have been cutting labor costs but not fast enough. More layoffs are ahead as firms work to catch up with falling output.
 Temporary factors boosted personal income in January. Once you get past the headline, income was basically down again. Personal income in January rose 0.4 percent, following a 0.2 percent decline in December. Special factors, including January pay raises for federal civilian and military personnel, boosted personal income. Partially offsetting was a special downward adjustment for loss of bonuses in many industries. Excluding special factors, personal income rose 0.2 percent in January.
But the important wages and salaries component actually declined 0.2 percent after a 0.4 percent fall in December. This component has fallen in each of the last three months.
 Consumer spending made at least a temporary comeback in January, rebounding 0.6 percent after a 1.0 percent drop the previous month. Prior to January, personal consumption had declined for six months in a row. Interestingly, the recovery in spending was largely in nondurables as consumers likely snapped up post-holiday bargains and decided to crank up the SUVs on cheaper gasoline prices.
 The direct impact of lower oil prices on headline inflation may be waning as the headline number posted its first positive since September. The headline PCE price index rose 0.2 percent, following a 0.5 percent decline in December. Meanwhile, the core PCE price index edged up 0.1 percent, compared to no change the month before. Year-ago headline PCE inflation eased to up 0.7 percent from up 0.8 percent the prior month. Core PCE inflation slowed to 1.6 percent from 1.7 percent in December.
It seems that the Fed may be more honest than we want about the economy. For weeks, we’ve been getting just gloomy outlooks for the near term. And the latest Beige Book was not an exception. The Beige Book prepared for the March 17-18 FOMC meeting confirmed recent statements from Fed officials that the recession is worsening in the first quarter—but about as was expected at this point. The standout statement is that no significant recovery is seen before the end of this year or early 2010. It seems that forecasts for recovery in late 2009 now have been hedged with the rebound date also including the possibility of early 2010.
"Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."
The Beige Book indicated that manufacturing has worsened, consumer spending is still sluggish but slightly firmed from December, residential real estate remains stagnant, and unemployment is rising. Basically, economic deterioration is broad-based but essentially as expected.
It was no surprise that consumer spending habits have changed sharply during the recession – and discounters are the beneficiaries.
"As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities."
The Beige Book also notes that price pressures have eased—including for wages.
"Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food."
On the critical issue of housing stabilizing, there are few signs of that. Residential real estate activity remains depressed and house prices continue to fall. The bottom line is that the recession is worsening but there were no unexpected bombs from the latest Beige Book. We are still on track for a longer and deeper than average recession.
The recession clearly has worsened in the first quarter. The good news is that inflation has eased sharply, leaving the Fed much leeway to continue its credit easing. But there are yet no signs of the recession bottoming. This is why equities continue to drift down as fiscal stimulus has not yet kicked in and banks are not doing much lending. These are reasons why the Fed’s TALF facility may be critical to boosting consumer and small business credit to get the economy moving.
This coming week the two market moving indicators are retail sales and international trade. With the consumer carrying the bulk of the economy, markets will certainly be paying close attention Thursday morning for the retail sales report.
The U.S. Treasury monthly budget report showed another huge deficit for January with the Treasury's budget shortfall coming in at $83.8 billion, bringing the fiscal year-to-date gap to $569.0 billion and dwarfing the $89.0 billion January cumulative for last year. TARP outlays, totaling $37.8 billion in January versus $55.0 billion in December, were heavily responsible for the continuing surge in the deficit. History provides little guidance to current federal spending but can provide perspective—basically out of morbid curiosity. Over the past 10 years, the average deficit for the month of February has been $79.7 billion and $109.2 billion over the past 5 years. February typically has a far worse deficit than other months in the year.
Treasury Statement Consensus Forecast for February 09: -$205.7 billion
Range: -$250.0 billion to -$190.0 billion.
Retail sales unexpectedly rebounded in January with a 1.0 percent gain, after a 3.0 percent drop in December. But the stronger number, which came off a low baseline in December, was likely due to heavy discounting to move inventories sitting on store shelves. Excluding motor vehicles, retail sales made a 0.9 percent comeback, after falling 3.2 percent in December. Looking ahead, the news is mixed. Discounters have been doing well in the chain store numbers. But others have not fared as well. The continuing deterioration in the labor market suggests that the bump up in sales in January was temporary. We already know that the auto component will be weak from a 4.7 percent monthly drop in February for unit new motor vehicles.
Retail sales Consensus Forecast for February 09: -0.5 percent
Range: -1.5 to +0.2 percent
Retail sales excluding motor vehicles Consensus Forecast for February 09: -0.2 percent
Range: -1.0 to +0.7 percent
Initial jobless claims actually reversed course, easing down 31,000 to 639,000 in the February 28 week from 670,000 the prior week. Even continuing claims showed a 14,000 dip for the February 21 week. But the four-week averages for both series continue upward, indicating that the unemployed are having a hard time finding jobs. The four-week averages for both hit record highs in the latest release.
Jobless Claims Consensus Forecast for 3/7/09: 645,000
Range: 610,000 to 660,000
Business inventories fell 1.3 percent in December but that was more than offset by a 3.2 percent plunge in business sales. In turn, the stock-to-sales ratio jumped 3 tenths to 1.44. Businesses have been trying to keep inventories in line but sales weakness has stayed one step ahead. But just maybe, that will change in January with the 1.0 percent jump in retail sales.
Business inventories Consensus Forecast for January 08: -1.0 percent
Range: -1.5 to -0.5 percent
The U.S. international trade gap in December continued to contract, once again due to a drop in oil prices and a fall in import demand. But exports also dropped again. The overall U.S. trade deficit shrank to $39.9 billion from a $41.6 billion gap the month before. The December narrowing was led by the oil deficit which decreased to $18.8 billion from $19.7 billion in November. The nonoil goods deficit also shrank to $31.6 billion from $32.9 billion the month before. We can expect continued softening in both exports and imports as both the U.S. and overseas economies fall further into recession.
International trade balance Consensus Forecast for January 09: -$38.1 billion
Range: -$44.5 billion to -$31.0 billion
Import prices dropped 1.1 percent in January on lower prices for oil and other commodities. Excluding petroleum, prices fell 0.8 percent, a little less steep than prior months. While consumer goods and capital equipment have not been as soft, we are likely to see oil and other commodities pull import prices down in February.
Import prices Consensus Forecast for February 09: -0.8 percent
Range: -2.5 to +0.8 percent
The Reuter's/University of Michigan's Consumer sentiment index for February came in at 56.3, compared against 61.2 in January. The latest number was barely above the record low of 51.7 set in May 1981. With the continued worsening in unemployment and further declines in stock prices, we may see a new record low set for March.
Consumer sentiment Consensus Forecast for preliminary March 09: 55.0
Range: 47.5 to 57.0
Econoday Senior Writer Mark Pender contributed to this article.
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