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Wall Street looking out for signs of recession

The start of 2008 has brought a harsh reality to Wall Street: The U.S. may indeed be headed toward recession.
/ Source: The Associated Press

The start of 2008 has brought a harsh reality to Wall Street: The U.S. may indeed be headed toward recession.

So, after suffering punishing losses the first three trading days of the year, the stock market will be seizing on any data or forecast in the coming weeks that can help investors determine if their worst fears are coming to pass. And earnings are now part of the equation, with results from Alcoa Inc., the first of the 30 Dow Jones industrials to report fourth-quarter results, opening earnings season on Tuesday.

Analysts polled by Thomson Financial expect, on average, the aluminum producer to post a drop in per-share profit, but the company’s outlook is likely to have a bigger impact on Wall Street than

Last week’s readings showed that the economy continues to slump amid the ongoing mortgage and credit crisis, and that energy costs could have further to climb. Over the course of the week, oil prices hit the psychologically important $100-a-barrel mark, investors found out that manufacturing unexpectedly contracted in December, and — perhaps most devastatingly — payrolls grew less than anticipated last month, while unemployment hit a two-year high of 5 percent. When people start losing their jobs, they pare back spending and find it harder to pay their bills, a trend that would aggravate already deteriorated lending conditions.

The news pounded stocks. In just the first three trading days of 2008, the Dow Jones industrial average lost 3.50 percent, the Standard & Poor’s 500 index fell 3.86 percent, and the Nasdaq composite index dropped 5.57 percent.

Economists and market analysts are still split on whether this year will bring recession, but virtually no one is completely discounting the possibility.

Keefe, Bruyette & Woods banking analysts are factoring into their forecasts a mild U.S. recession in 2008, and they predict the nation’s unemployment will reach 6 percent by the end of the year.

There’s hope, though — Fed rate cuts, companies continuing to find ways to make money, and ongoing growth overseas could save the U.S. economy from recession and stocks from a bear market, according to Michael Sheldon of Spencer Clarke LLC.

This week, as it has been for months now, Wall Street will be eyeing housing data — though bad news rarely comes as a surprise now to investors who have already sold off stocks related to homebuilding or mortgage lending. On Tuesday, the National Association of Realtors releases its forward-looking index of U.S. home sales for November. Economists surveyed by Thomson Financial predict the index will slip after gaining for two straight months, despite the association’s forecast last month that sales and prices will start rising modestly next year.

KB Home’s quarterly earnings report Tuesday could offer further insight into whether the housing market is near its bottom or has much further to fall. The homebuilder is expected to post a loss.

With the job market and energy sector in focus, the Energy Department’s weekly report Wednesday on crude oil, gasoline and heating oil inventories and the Labor Department’s weekly reading Thursday on jobless claims will be closely monitored.

Comments from several Fed officials could also give investors a clearer view of where the economy is headed, and if inflation is a growing concern to the central bank, which meets Jan. 29-30 to decide whether to lower interest rates again for the fourth time in a row.

On Tuesday, Philadelphia Fed President Charles Plosser will speak in Gladwyne, Pa., on the economy, and Boston Fed President Eric Rosengren will speak in Hartford, Conn., on the economy as well. On Wednesday, St. Louis Fed President William Poole will speak in St. Louis on economic and financial literacy, and Thursday, Kansas City Fed President Thomas Hoenig speaks on the economy in Kansas City, Mo.

Lastly, on Friday, the Commerce Department reports on November’s international trade and December import prices. These two pieces of data that could indicate how the weakening dollar is helping or hurting the United States’ position in global commerce.