A second straight month of job losses all but ended the debate over whether the U.S.
economy has slipped into recession. Now the question is how to get out.
"Turn out the lights. The party's over. We are in a recession," said Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York.
Don't count on debt-laden households to spend their way back to growth. As for banks, they are preoccupied with cleaning up their balance sheets after seven months of credit turmoil, which means they are unlikely to throw open the cash spigots. The federal government is mired in debt as well.
All that adds up to a protracted period of deleveraging -- a fancy word for paring debt -- and perhaps an equally long period of subpar U.S. economic growth.
While most economists still believe that the economy will rebound in the second half of this year as U.S. Federal Reserve interest rate cuts and government tax rebates kick in, some are
starting to push back the recovery date into 2009.
U.S. employers cut 63,000 jobs last month, according to Labor Department data released Friday. That followed a loss of 22,000 jobs in January. December's job growth was only half
as big as the government had earlier reported.
Economists even found bad news in the fact that the unemployment rate fell to 4.8 percent from 4.9 percent, noting that this was merely the result of a steep drop in the size of
the work force because more people gave up looking for jobs.
Employment holds the key to the U.S. economy because jobs mean paychecks, paychecks mean consumer spending, and spending accounts for about 70 percent of the economy.
"The debate should no longer be about whether there is or is not a recession, only about how deep it will be," said Nigel Gault, chief U.S. economist with Global Insight in Lexington,
Consumers were already under strain from the slumping housing market and rising costs for food and energy. A report Thursday showed that household net wealth fell for the first time in five years. The savings rate has hovered around zero for several months.
With credit market turmoil prompting banks to tighten lending standards, consumers have had a tougher time qualifying for cheap mortgages, auto loans and home equity lines. That suggests households will cut spending.
Later on Friday, the Federal Reserve will release data on consumer borrowings and interest rates for January. Borrowings had been on an upswing for much of 2007 but the growth rate
abruptly slowed in December, heightening concerns that consumers may be tapped out.
The White House acknowledged that the U.S. economy was stuck in a period of "low growth", and pointed to a recently passed $168 billion stimulus package as a way to address it.
Lehman Brothers economist Ethan Harris said the rebate checks would not be enough to prop up the economy.
"We now believe the tax rebate checks will arrive too late to prevent an outright recession," he said, adding that he expected the economy to dip into negative territory in the first and second quarters of the year.
"While we are penciling in a very mild recession, it is important to not get hung up on the 'recession, no recession' debate. The more fundamental point is that the economy is
likely to experience an extended period of very weak growth, a rising unemployment rate and significant further Fed rate cuts."
The best hope for the federal stimulus package may be a less-discussed provision that gives companies a tax incentive to make purchases this year. That may boost corporate spending,
cushioning the downturn.
There was one small silver lining in the ugly employment report. A sluggish labor market eases inflation pressures, making it easier for the Fed to lower interest rates.
The central bank has already cut rates by 2.25 percentage points since mid-September, and another cut of at least a half-point is widely expected when its policy team meets on March 18. Goldman Sachs economist Jan Hatzius said an emergency rate cut before that meeting was not out of the question.
J.P. Morgan's chief economist, Bruce Kasman, said he expects the Fed to cut by three-quarters of a point at the March meeting, and another half point in April.
"It is appropriate to characterize the U.S. economy as having entered a recession in the first quarter," he said.