COMMERCE BANK ECONOMIC REVIEW - JANUARY 2008

“A Happy New Year it hasn’t been so far for the economy.”

By Joel L. Naroff, Ph.D.

I hope everyone had a good end of 2007, because the first few days of 2008 haven’t been a lot of fun. The economic data so far have been dreadful with manufacturing in trouble and jobs hard to find. Now all the talk is about recession. 

The first broadside was the Institute for Supply Management’s December manufacturing index. It tanked. For the first time since January 2007, the manufacturing sector was moving in reverse. The business activity index was the lowest since spring 2003, and even worse, the orders index hit its lowest mark since the recession days of 2001. Ugh.

After seeing that manufacturing was feeling the full effects of the housing collapse and the $100 a barrel for oil, we waited anxiously for the December employment report – and with good reason. Job gains totaled only 18,000 and when government increases were excluded, we discovered the private sector actually reduced its payrolls. 

The carnage in the employment report was fairly widespread. We knew construction was on its back, but the layoffs were greater than anticipated. Manufacturers were almost as brutal – nearly 70% of the manufacturing industries reduced their workforces. Retail, transportation, information and financial sectors also cut back. However, hiring did continue in health care, education and professional services though not enough to keep the unemployment rate from rising sharply to 5%.  

With the blizzard of bad news, it was not surprising that investors headed for safer environs. The declines continued the trend that we saw at the end of last year. Bad economic data and falling stock prices led to all the talking heads on television to start using the “R” word quite casually.

So, is a recession baked in the cake or, worse, already here? Once again, the answer is…not necessarily. First, the same supply managers who were distressed about manufacturing were more positive about the services sector. Activity continues to ease, but is still moving forward. Both demand and hiring improved, so at least the largest part of the economy is holding on.

Solid world growth also is helping. Unquestionably, the slowdown in the U.S. will cause foreign economies to feel the pinch. If the U.S. consumer doesn’t spend, they don’t sell.  But U.S. exports should continue to be decent even if the growth rate moderates.

And then there is the Federal Reserve. The pressure is on for the central bank to cut rates again at their next meeting. But there also are worries about inflation. Between skyrocketing energy costs and surging food expenses, consumer prices are going up at a pace that, for many Fed members, is disquieting. Nevertheless, it would be surprising if there isn’t a rate cut on January 30th – with a ½ point reduction a real possibility.

But ultimately, it still comes down to jobs. Before we can say a recession is inevitable, we need to see additional months of weak job gains or even losses. There were solid payroll increases in October and November and the three-month average is quite satisfactory. Let’s see what January and February have in store, especially since BLS is notorious for revising the data. If you remember, the August jobs report was initially reported as being negative only to be revised upward to a solid gain.   

The risks of a recession have clearly grown, but it doesn’t look to be here yet – we still could escape without one.

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 450 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.