Brooklyn's Progress
February/March 2008

BY JOEL L. NAROFF, PH.D.

This was a month that will long be remembered. The international stock markets nearly melted down, the U.S. equity markets faltered, the Fed cut rates twice and the economic data turned ugly. “Recession” is now being used as often as “hello”. There even was one of the more major upsets in the Super Bowl as the Giants beat the Patriots. Clearly, the stars are aligned for something – if I only knew what!

With the weak December jobs report playing on investors minds, the markets became really wild. The idea that a U.S. economic slowdown could harm the world economy finally began to be recognized as a real possibility. Ultimately, it led to a major sell-off in world markets. 

The threat that the stock downturn in Asia and Europe could spread to the United States became very real and the Federal Reserve stepped in, cutting rates by 3/4% in a surprise action only one week before its regularly scheduled meeting. The emergency action worked – at least for a short period of time. The U.S. markets stabilized as did the world markets.

But the Fed wasn’t done and still is not likely done. At the scheduled January 30th meeting, the FOMC once again reduced rates. This time the cut was ½ point, bringing the total rate decline to 1.25% in a little over a week. This level of aggressiveness is rarely seen by any Fed and coming from such a cautious group of Central Bankers, it was eye-opening.

Did the Fed do the correct thing? Yes. A world and U.S. equity meltdown could have spread through the financial system, creating an even greater credit crunch. And more fundamentally, the economy appeared to be weakening greatly and the Fed members simply had to move to a much more appropriate monetary stance. They had to hit the gas pedal – and they did. 

But the Fed’s strong action was not the end of the story. The January employment report made the December one look good. For the first time since August 2003, payrolls declined. Okay, the miniscule December increase initially reported turned out to be fairly decent, but that was old news. Now we are looking at a loss of jobs and even the modest decline in the unemployment rate couldn’t make things look better.

And then the nation’s supply managers weighed in. The Institute for Supply Management’s business activity index collapsed in January. The drop was the largest in the survey’s 10½ year history and, for the first time since March 2003, it signaled a decline in service sector activity. New orders, including imports, cratered. Hiring seemingly stopped. Backlogs disappeared. Fourteen of the seventeen industries surveyed contracted. Because services make up the largest part of the economy, this was particularly bad news. 

So what happens next? The Fed is not meeting again until March 18th, but we could get another rate cut then. The cumulating negative news on the economy is likely to generate further action on a fiscal stimulus package and it might be bigger than expected. Because fiscal policy works with a lag, it might not be of much help until much later in the year.  Still, Congress likely will pass one.

I have been hopeful we could escape a recession. Although we may not be in one yet, the white flag is being readied. I am willing to wait for the next month of data before I give in, even if others have already made their judgment. 

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 460 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.