Economy in full grip of recession


WASHINGTON (AP) – Anyone looking for a bright spot in the recession might have pointed to a reading Tuesday of the nation’s office workers, retailers and other service industries, which contracted at a slower-than-expected pace in December.

But even the closely watched gauge of activity in the service sector, where most Americans work, showed it was still shrinking. And coupled with two bleaker economic reports, it suggested to analysts that the struggling economy is likely to shed many more jobs in the months ahead.

The Institute for Supply Management, a trade group of purchasing executives, said its service sectors index posted a small increase to 40.6 in December from 37.3 in November. Economists had been looking for the index to slip further in December. Any reading below 50 signals economic contraction.

Despite the better-than-expected reading, analysts said the overall index – and its major components, such as employment prospects – remained at recessionary levels. Ian Shepherdson, chief U.S. economist at High Frequency Economics, a private research firm in Valhalla, N.Y., said the reading on the employment component of the index was consistent with “massive job losses” of around 350,000 per month.

“This is not an indicator of recovery,” Shepherdson said.

Other reports Tuesday on factory orders and pending home sales showed the economy’s troubles have intensified since the worst financial crisis in seven decades erupted with fury in the fall.

Wall Street advanced moderately Tuesday, paring some earlier gains following the mixed economic readings but stocks still finished at their highest levels in two months. The Dow Jones industrial average gained more than 62 points to 9,015.10, and broader indexes also rose.

Still, economists are predicting that December’s unemployment report, which will be released Friday, will show the total economy lost a half-million jobs last month after a loss of 533,000 in November.

On Tuesday, Pittsburgh-based aluminum maker Alcoa Inc. (AA) (AA) said it will cut 13,500 employees, or 13 percent of its global work force. A day earlier, Philadelphia-based managed care provider Cigna Corp. (CI) (CI) said the slumping economy was forcing it to cut roughly 1,100 jobs, about 4 percent of its work force.

The labor market is being slammed by a recession that already has lasted for a year, the longest stretch in a quarter-century. The jobless rate, which jumped to a 15-year high of 6.7 percent in November, is expected to hit 7 percent in December. Many analysts are worried that the jobless rate could top 8 percent later this year before the economy recovers enough to start generating better hiring prospects.

Federal Reserve Chairman Ben Bernanke and his colleagues also are concerned about the length and severity of the downturn, according to minutes of their closed-door deliberations released Tuesday.

The minutes of the Dec. 15-16 meeting showed that Fed officials feared that the economy could “remain weak for some time and that the downside risks to economic growth would be substantial” despite the central bank’s aggressive actions to fight the downturn. The Fed in December slashed a key lending rate to nearly zero and pledged to use other unconventional methods to fight the slump.

The Commerce Department reported Tuesday that orders to factories fell for a record fourth straight month in November, dropping by a bigger-than-expected 4.6 percent following a 6 percent plunge in October that was the biggest drop in more than eight years.

Meanwhile, pending home sales fell to their lowest level on record in November, according to a report from the National Association of Realtors.


The Realtors’ 8-year-old index of pending sales dropped to 82.3, down from an October reading of 85.7. Since there is typically a one- to two-month lag between when a contract and a completed sale, the bigger-than-expected fall in the pending sales index signaled anemic sales in coming months.

“Plain and simple, the economy is in the dumps,” said Joel Naroff, chief economist at Naroff Economic Advisors.

But investors and businesses are hopeful that the new Congress that was installed Tuesday and President-elect Barack Obama will reach agreement in the next few weeks on a massive economic stimulus program. Lawmakers in both houses pledged to move quickly on the stimulus program, which is expected to include $300 billion in tax cuts.

Various industries are hoping to be included in the new round of government stimulus, including the beleaguered housing sector, where the economy’s troubles began more than two years ago.

Lawrence Yun, chief economist for the Realtors group, said the slump in pending home sales underscored that a “real estate-focused plan is urgently needed.”

Despite the dismal news Tuesday, there were some glimmers that better days could be ahead, said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Mass. Recent substantial reductions in auto loan rates and some easing in credit standards may be pointing to stabilized consumer spending, which accounts for two-thirds of economic activity, and has been plunging in recent months.

But Bethune said Congress must come through quickly with another economic stimulus program to make the hopes of recovery a reality.

“A large dose of targeted tax relief, executed early in 2009, would be the most effective mechanism for jolting the economy out of the recessionary cycle quickly,” Bethune said.


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