With the latest numbers on jobs growth showing the U.S. economy deteriorating more rapidly than expected, the threat of a recession - and the measures needed to revive growth - has taken on a larger political profile.
Friday's jobs report for December, showing a much weaker than expected net gain of 18,000 jobs, added to growing fears that the U.S. economy may be headed for — or already in — a recession. Forecasters were generally looking for growth of about 70,000 jobs. The unemployment rate jumped from 4.7 to 5.0 percent, which was also higher than expected.
With evidence mounting that the economy weakened further than expected in December, Friday's report added to the political debate over how to address the impact of a declining housing market, rising energy prices and a tax policy that has the government spending more money than it takes in. And as higher energy prices pose a threat of rising inflation, the Federal Reserve has less room to maneuver as it tries to cut interest rates to keep the economy humming in an election year.
The White House sought to downplay Friday's jobs report, and warned that raising taxes could harm the economy further.
"This economy of ours is on a solid foundation, but we can't take economic growth for granted," President George Bush told reporters after meeting with his so-called Working Group on Financial Markets.
The White House and the Democratic-controlled Congress have blamed each other for not doing enough to stem the fallout related to the housing and credit debacles.
"If there were ever a shot across the bow to this administration to get off its laissez-faire boat and start helping the economy, this is it," said Charles Schumer, D-N.Y. Other Democrats, including presidential contender Sen. Hillary Clinton, called the employment figures troubling and criticized Bush's economic stewardship.
After six years of uninterrupted growth, the outlook for the U.S. economy in 2008 has darkened considerably in just the past month. While many economists say it’s too soon to know whether a recession is coming, forecasters say the latest economic figures don’t look promising.
“If there’s going to be a recession, it’s entirely possible that we are in it — or just beginning it now,” said Nigel Gault, an economist at Global Insight. “We won’t know for a while. In two or three months, looking back from there to the December, January, February numbers, I think it will be evident by then whether or not we’ve entered a recession.”
Given the rapid pace of slowing since the sizzling 4.9 percent annual growth rate logged in last year’s third quarter, there is some speculation that the economy may already be slipping into a period of negative growth. Given the lag in the collection and analysis of economic data, it’s not unusual for a recession to be underway before statistics confirm it.
"The rise in the unemployment rate is very disturbing," John Ryding, chief U.S. economist for Bear Stearns, told clients in a note Friday morning. "January's data will be very important in informing on the state of the business cycle," he added.
Saying he was now on "recession watch," Ryding noted that the unemployment rate has now risen 6-tenths percent in the last year, a jump that hasn't happened since 1949 without a recession following.
With the presidential campaign heating up, and the economy sure to be an issue, some voters are convinced the economy is already in recession. Though popular definitions vary, the term generally refers to a period of declining Gross Domestic Product. Some regions of the country, such as the industrial midwest, and some industries, such as housing, are apparently already headed in reverse. But a national recession can't be confirmed until the economic data show the overall economy is indecline. Since World War II, economists, academics and investment analysts have relied on the National Bureau of Economic Research, a private research group, to provide the "official" timing and severity of recessions.
Rising foreclosures and falling home prices have also put something of a damper on consumers, many who have funded a large portion of their spending in recent years with gains on the value of their homes. Coupled with the recent resurgence in energy prices, many consumers are feeling squeezed; any resulting slowdown in spending could also present the economy with a substantial headwind.
The December jobs data follows bad news earlier this week from a monthly report on U.S. manufacturing activity from a private research group; the numbers showed a surprise slowdown to the lowest level in almost five years. Though it takes more than a single month’s data to confirm a trend, the report from the Institute of Supply Management suggests that the economy may be in worse shape than many economists had believed.
That report follows more bad news from the housing market — which continues to collapse after a prolonged boom that came to an abrupt close last year after years of easy-money lending left lenders coping with big losses and millions of borrowers facing foreclosure.
New home sales in November — the latest data available — sank to their lowest level in more than 12 years. After months of declining sales and rising inventories of unsold homes, the drop was worse than most analysts had expected.
“At the moment housing activity is just plunging, and it is a huge drag every quarter on growth,” said Gault.
Forecasters who see the glass half full are hoping that the sharp drop in new home starts is actually a good sign because it reduces the inventory of unsold homes. Eliminating that backlog is a key ingredient to any recovery in the housing market. And the sooner that recovery comes, the sooner the overall economy can regain strength.
A pickup in exports by U.S. companies – due in large part to the weakness in the dollar - has also provided an important buffer to the economic damage done by the turmoil in the housing and lending markets. A weaker dollar makes U.S. goods more competitive when sold in overseas markets: it’s the equivalent of putting all U.S. goods on sale for foreigners.
“While there is plenty to be negative about with respect to housing, credit and the consumer, at the same time we believe we are in the early stages of a manufacturing renaissance,” Merrill Lynch economist David Rosenberg wrote in a note to clients Wednesday.
But, as Wednesday's ISM data indicated, it’s not clear that that surge in exports will continue. A lot depends on how well the economies of major U.S. trading partners hold up this year. If growth abroad remains strong, continued demand for Made in America products could offset the meltdown of the housing market and help the U.S. economy get through the current weakness without heading into reverse. If the housing market remains weak, consumers tighten their belts and the export sector falters, there would be little left to head off recession.
The question of whether the economy dodges a recession won’t be answered until several trends become clearer — starting with signs of life in the housing market. Another key ingredient is the impact of recent moves by the Federal Reserve to lower interest rates as it tries to clear the sand out of the gears of the global credit markets. After all but shutting down in August, the debt markets perked up in the fall — only to slow again in December. Multi-billion-dollar losses posted by major banks and investment houses have spooked lenders and investors and tightened credit — even as the Fed is trying ease.
The Fed’s latest rate-cutting moves — and its promise to pump billions of dollars into the global credit markets — are designed to ease those lending fears and get the financial markets back on an even keel. But in minutes of the Fed's Dec. 11 meeting released Wednesday, policy makers acknowledged the trouble it faces in setting the right course.
“Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain,” the minutes said.
Higher oil prices could also limit the Fed’s rate-cutting options if higher energy prices begin to work their way into the cost of other goods and services and stoke inflation above current levels. The antidote for an outbreak of inflation is usually to raise — not lower — rates.
That could force the Fed to choose between raising rates to contain inflation and lowering them to promoting growth — a choice made more difficult by the political pressures of the presidential campaign season.