updated 3/30/2008 3:06:46 PM ET 2008-03-30T19:06:46

Stocks may already be pricing in a recession, but they haven't priced in a very deep one. If this week's data on the job market and manufacturing are worse than Wall Street is anticipating, investors should not be surprised to see another tumble.

Major Market Indices

To be sure, the stock market is usually pretty adept at sizing up the economy. And many market experts are saying stocks may have already hit bottom. But considering how much mystery still surrounds the mortgage crisis — not to mention the fact that many analysts are starting to pare back their estimates for 2008 corporate profits — calling the stock market's decline over is a bit premature.

Last week began with a rally and ended with a sell-off after a batch of economic readings gave investors little to cheer about. The Dow Jones industrial average finished the week down 1.17 percent, the Standard & Poor's 500 index ended up 0.14 percent, and the Nasdaq composite index ended down 1.07 percent.

This Friday, the market expects the Labor Department to report that payrolls fell by about 50,000 in March after a 63,000 drop in February, according to the median estimate of economists surveyed by Thomson Financial/IFR. Economists also predict the unemployment rate will rise back up to 5 percent from February's 4.8 percent.

"If you start seeing deterioration in employment, it's very, very hard not to have a recession," said Jay Mueller, economist at Strong Capital Management.

Historically, recessions have brought several back-to-back drops in payrolls, an unemployment rate persistently above 5 percent and initial unemployment claims that top about 400,000 a week, Mueller said.

Right now, the job market is not quite near recession-level trends, but it's close: Unemployment briefly hit 5 percent late last year, jobless claims have recently been in the 350,000 to 375,000 range, and payrolls have decreased for two months in a row.

The uncertainty surrounding the U.S. employment picture in turn means that consumer spending and consumer credit trends are largely indeterminable. So even in a best-case scenario — a strong jobs report alongside other strong data — the stock market might see a brief pop but then remain in a holding pattern for the next few months until it is sure that the economy's weak period is a short one.

"It seems more likely that things are going to be range dominated until we get a bit more clarity," said Jack Caffrey, equities strategist at JPMorgan Private Bank.

So for now, investors can expect more big swings, but little sense of direction until first-quarter earnings reports — along with their outlooks for the rest of the year — are released next month.

This week starts with the Chicago Purchasing Managers' manufacturing report on Monday, which is expected to show a smaller contraction for March than it did in February.

On Tuesday, the Institute for Supply Management releases its national manufacturing report, and the market anticipates a shallow contraction for March, similar to February's.

Then on Thursday, the ISM reports on the service sector, which is expected to post a minor contraction for March, as it did the previous month.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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