Markets & Finance

Around the Street: More Evidence of Recession


Economists seem to agree the the U.S. is entering a "dark period" characterized by rising unemployment

From Standard & Poor's Equity ResearchWhile recession fears have increased thanks to the current U.S. financial crisis, data released Oct. 1—including a sharply lower than expected reading on a closely followed gauge of U.S. manufacturing sentiment—appeared to increase the odds of a downturn. BusinessWeek and Standard & Poor's MarketScope compiled the thoughts of some Wall Street economists and strategists about the latest data on Oct. 1:

Zach Pandl, Barclay's Capital, New York

The ISM manufacturing index dropped to 43.5 in September from 49.9 in August. The index is now at its lowest level since October 2001 and signaling a significant pace of contraction in the nation's manufacturing sector. Of the components of the composite index, only the supplier delivery time index improved. Employment, production, new orders, and inventories all posted significant declines. The current level of the ISM is now consistent with gross domestic product growth just above zero, according to historical correlations. The fall in the employment index to just 41.8, from 49.7, largely offsets the positive surprise in today's ADP report, leaving the risks around our forecast of -125,000 for nonfarm payrolls roughly balanced. Announced layoffs in the Challenger report and a further deterioration in consumers' perception of labor market conditions in the consumer confidence release also point to a soft employment report. In contrast, a sharp rebound in withheld income tax receipts during the month adds modest upside risk.

Michael Englund, Action Economics

Today's sharp drop in the September ISM report, alongside sizable downward back revisions in the construction spending report that introduced a long-awaited downturn in the nonresidential construction sector, reinforce the assumption that all of 2008 will eventually be deemed a recession by the [National Bureau of Economic Research]. In particular, the factory sentiment measures had previously been sizably outperforming our assumed GDP growth path, which provided a caveat to our assumption of a sharp slowing into the fourth quarter, but the ISM drop helped to narrow this gap. The morning's ADP employment figures [which showed an 8,00 drop in payrolls in September] actually outperformed our assumption, but little can be read into these volatile figures, and we still expect a large 100,000 payroll drop in Friday's [September employment] report, with notable downside risk.

Jan Hatzius, Goldman Sachs

Our current official forecast sees the unemployment rate rising to 7% in late 2009. The resulting trough-to-peak increase of 2.5 percentage points would be in the middle of the range seen in postwar recessions—slightly worse than the 1990 and 2001 downturns but considerably less bad than the 1973 or 1981 slumps. However, the sharp tightening of financial conditions over the past three months suggests that the unemployment rate will rise to more than 7%. For this reason, we now believe that Fed officials will supplement their aggressive liquidity provision with further reductions in the federal funds rate target over the next 3-6 months. The extent of our forecast changes will depend on what happens to the Treasury's Emergency Economic Stabilization Act in Congress, as well as the economic data later this week. But the peak unemployment rate will likely be higher and the terminal federal funds rate lower than in our current forecast.

Tony Crescenzi, Miller Tabak

Many forecasters have penned forecasts for [gross domestic product] to contract in the fourth quarter, and perhaps in the first quarter. Recent jobless claims figures have helped to confirm the idea and help investors to come to terms with the idea of slowing. I've emphasized since the summer the idea that the claims figures were indicating the U.S. economy was entering a dark period characterized by increased joblessness. I believe it will take between 1-3 months of bad economic news and in particular declines in payrolls before investors become numb to bad news. In past recessions, investors eventually ignored bad employment data, having been numbed to the data by previous data and plentiful evidence of impending doom. The more that bad economic news emerges, the more confident we can all be that a bottom for riskier assets is at hand. Investors will have to grapple with whether the downturn could deepen or become more protracted than normal as a result of the credit crisis, therefore requiring more patience than usual in proclaiming that the worst is already discounted.

David Zion, Credit Suisse

The hysteria surrounding fair value accounting has reached a fevered pitch. FAS 157, Fair Value Measurements, is being blamed for everything from the credit crisis and multibillion dollar writedowns to the N.Y. Mets missing the playoffs. In our view, the accounting is not the problem: It is reflecting an economic reality that asset values are falling. The real problems were overexposure to certain assets, poor risk management, misunderstood mispriced risks, and lots of leverage. We would prefer the financial statements reflect real economic volatility rather than a false sense of stability.


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