US recession: Doubts vanishing with jobs

The deceleration in the United States economy has now brought it into negative territory, at least in terms of job growth. Continued turmoil in credit markets could keep it there for a while more.

According to the Friday report from the Labor Department on non-farm payrolls, the US economy lost 63,000 jobs in February. This is the second consecutive month that the economy has lost jobs based on the establishment survey. For January, the survey showed a loss of 22,000 jobs. The household survey showed an even sharper deterioration in employment, with 255,000 jobs lost in February.

The unemployment rate did fall to 4.8 percent in February from 4.9 percent in January. However, the fall was due to the labor force declining by 450,000, not to a pickup in employment.

With the latest decline, employment in the US has regressed to the extent that, based on both the establishment and household surveys, the number of jobs in February was barely higher than a year ago. It has historically been rare for the US economy to show such weakness in employment growth without a recession.


Some economists no longer have any doubt that the economy is falling into a recession. Nigel Gault of Global Insight wrote about the employment report on Friday: "The debate should no longer be about whether there is or is not a recession, only about how deep it will be."

Earlier in March, surveys from the Institute for Supply Management (ISM) had also pointed towards a recession. The ISM's manufacturing PMI dipped below 50 again in February to 48.3 from 50.7 in January. Its non-manufacturing index did bounce up to 49.3 in February from 44.6 in January. Nevertheless, with both indices below 50, both the manufacturing and non-manufacturing sectors in the US are now contracting, according to the ISM surveys.

Meanwhile in the beleaguered housing industry, the bad news continues. The Mortgage Bankers Association reported last week that US mortgage foreclosures rose to their highest levels ever in the fourth quarter of 2007.

To make things worse, credit markets are continuing to deteriorate. The spread between the 3-month US dollar LIBOR and 3-month Treasury yield, which had improved in recent months after the introduction of the Federal Reserve's Term Auction Facility (TAF) in December, has widened again recently, inducing the Federal Reserve to announce on Friday that it was injecting more liquidity into the financial system through the TAF as well as through weekly 28-day repurchase agreements.

The persistence of the financial turmoil means that stress is now making itself felt in important parts of the credit market. The spread between corporate bond yields and 10-year Treasury yields and the spread between 30-year mortgage rates and 10-year Treasury yields have both widened dramatically over the past few months to levels that in the past have often been associated with recessions.

Under such circumstances, it was no surprise that last week, we had reports that mortgage lender Thornburg Mortgage and mortgage-bond fund Carlyle Capital Corporation both failed to meet margin calls.

If the US economy is falling into recession, as Gault and many other economists now think, then announcements of losses and failures among firms will become routine in coming months.