Common Cents

by Joel Naroff

“It looks as if the question is ‘no longer will we go into a recession’, but rather ‘how long and deep will it be?’”
For months, there has been the hope that the economy could skirt a recession. Even while the data deteriorated, it was believed that job and income gains would allow consumers to continue to hold up their end of the bargain. But then we got the killer: a second month of job losses. Although a recession is not a certainty, the white flag has started going up the pole.
Last month, I argued that despite the first job losses in 4½ years, growth could continue. But the January drop was followed by even larger declines in February, and the details of the employment report were not good. The biggest losers were manufacturing, construction and retailing. That was not a great surprise, but the extent of the losses was almost breathtaking. Payroll cuts in those three sectors totaled 125,000 workers. For the fourth consecutive month, fewer than half the industries reported job increases. In other words, the softness is widespread.
Even the decline in the unemployment rate to 4.8% wasn’t necessarily something we should get excited about. Why? Because the labor force contracted. With all the news about a recession, people may be giving up looking for work. To the government, if you are not an active participant in the labor market, you are not counted as unemployed.
It wasn’t just the jobs report that is causing concern. The other data released were not great either. The supply managers indicated manufacturing was deteriorating faster. Although the service sector slump was a lot less in February, it too was having problems. Consumer confidence is cratering and the housing sector is showing no signs of turning around. Of course, with housing starts and sales at such low levels, we could see the bottom by summer. But a construction rebound is not likely soon, as the number of homes for sale is way too high. Continued declines in prices will not help ease household concerns.
Meanwhile, the Federal Reserve is reacting more strongly to the deteriorating economy. Liquidity is being added to try to deal with the persisting credit markets’ problems. The Fed also is likely to cut rates at the March 18th FOMC meeting. In addition, with the conforming mortgage amount being raised to nearly $730,000 in some areas, larger mortgages may become a little cheaper. This could boost the housing market, although don’t expect any miracles.
So, is this a recession? Technically, a recession is determined by looking at several critical monthly economic numbers, not by the popularly assumed two consecutive quarters of negative GDP growth. The payroll numbers are signaling a recession, although not all the other data are doing so. But it really doesn’t matter: To most households and businesses, we already are in one and they are reacting accordingly.
Still, there is a ray of hope. Recessions are usually relatively short, lasting less than a year. The last two were eight months long. Thus, the economy should be back up and running by year end. Until then, things could be difficult.
Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank , is a leading financial services retailer with more than 470 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Southeast Florida. Commerce Bancorp (NYSE: CBH) is headquartered in Cherry Hill, NJ and has $50 billion in assets. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.