With economic news getting bleaker by the day and worries growing about credit markets seizing up, Wall Street investors have been scurrying for cover. The main US indexes have hit their lowest levels in a year and a half as fears about recession have risen and consumers and business are battening down the hatches to ride out an expected economic storm.
The Dow Jones Industrial Average tumbled 3.04 percent for the week to close on Friday at 11,893.69, its worst level since October 2006. The tech-heavy Nasdaq composite slid 2.59 percent to 2,212.49 while the broad-market Standard & Poor's 500 index retreated 2.80 percent to 1,293.37.
The market wallowed in losses as any doubts about a deep crisis in the world's biggest economy were erased by data in the past week. The key was Friday's report showing a loss of 63,000 jobs in February, signalling a sharp deceleration in economic momentum.
Even the White House was unable to put a favourable spin on the news. President George W. Bush's top economic adviser, Ed Lazear, did not rule out shrinking economic activity for the current quarter.
"We don't really know whether it will be negative or not," Lazear told reporters. "This quarter will probably be our weakest quarter ... Whether you call that 'a recession' or not is something that we won't know for many months." Most private economists said the writing was on the wall. Ethan Harris, economist at Lehman Brothers, said the Federal Reserve's interest rate cuts and 168-billion-dollar economic stimulus passed by Congress will be too late to avert a recession.
"While we are pencilling in a very mild recession, it is important to not get hung up on the 'recession, no recession' debate," he said. "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 Fed stepped up efforts to shore up the banking system by boosting liquidity in direct credit auctions and repurchase agreements, moves that could pump 200 billion dollars into markets. But some say that might not be enough to jump-start an ailing economy. "Five interest rate cuts by the Federal Reserve simply haven't restored confidence to the credit markets," said Fred Dickson, market strategist at DA Davidson & Co.
"The rate cuts simply aren't working and result in putting more pressure on the dollar and oil prices which is compounding the problems in the credit market and the economy."
Dickson said that for the stock market, "we don't hold much hope that there will be enough investor conviction to trigger a decent oversold rally until something positive surfaces in the credit markets."
In the coming week, the market will get fresh data on the US trade balance - a report that often hurts the dollar, and has the potential to hurt stocks further.
Also on tap is a report on consumer inflation - another sore point for investors since rising prices could complicate the Fed's effort to stimulate growth through interest-rate cuts. Markets are also braced for a monthly snapshot on retail sales, which will show how American consumers are coping with the economic turmoil.
The retail sales report "will reflect the perfect storm now lashing American consumers," said Sal GuatGLGL. The weaker-than-expected report boosted the odds of another cut in interest rates by the Fed, which has already slashed in federal funds target from 5.25 percent in September to 3.0 percent.
The Labour Department report was released minutes after the Fed announced actions to pump more liquidity into the distressed banking system, which is reeling from a horrific slump in housing and tighter credit, in a further threat to economic growth. But some say the Fed is losing a grip on efforts to jumpstart the economy.
"Banks don't need incentive to borrow as much as they need incentive to lend," said Kevin Giddis, analyst at Morgan Keegan. "We are in an unprecedented real estate and credit crisis that is whipping its way through the US economy like a mid-western tornado."
Fred Dickson, a market strategist at DA Davidson & Co said the rate cuts are failing to help spur economic activity and that the Fed "should stop cutting rates."
"The rate cuts simply aren't working and result in putting more pressure on the dollar and oil prices, which is compounding the problems in the credit market and the economy," Dickson said. Ethan Harris, economist at Lehman Brothers, said the collapse of the dollar while gold and oil have surged to records are potential inflation indicators that threaten confidence in the Fed, but predicts the central bank will regain the upper hand.
"We believe that loss of confidence will be short lived - as the economy and commodity markets weaken both actual and expected inflation will likely fall," Harris said. Still, Harris said the US will be unable to avert recession because the Fed's rate cuts and the 168-billion-dollar economic stimulus passed by Congress will take time have an impact.
"We are now pencilling in a recession in the first half of 2008 and have trimmed our already very anemic recovery figures," he said. "The feeble economy should ease inflation over time."
Although Friday's report showed a slight drop in the unemployment rate to 4.8 percent, the labour force available for work fell by 450,000 and the participation rate slipped 0.2 percentage points.
Overall, the report signalled a sharply weaker-than-expected performance for the US economy, which according to analysts needs to add at least 100,000 jobs per month to keep pace with new labour market entrants. Ahead of the Labour Department announcement, the Fed unveiled two initiatives aimed at easing a growing credit squeeze that would make 200 billion dollars available to the strapped financial market.
The central bank hiked the amounts available in its Term Auction Facility program, in which banks bid for loans, to 100 billion dollars this month. It also launched a series of repurchase transactions expected to reach 100 billion dollars to pump more liquidity into the banking system.
"This was a good news-bad news story," said Scott Brown, economist at Raymond James & Co "It's good the Fed is coming to the rescue, the bad news is that they have to."
Brown said the main worry is that the economy may enter a downward spiral with "adverse feedback loops" where bad news feeds on itself and causes consumers and businesses to retrench further.
"The Fed will act with all its power to avoid a meltdown contagion that leads to a depression," said David Kotok at Cumberland Advisors. "And they know that contagion must be arrested and that can only be done with huge offsetting liquidity injections."
Kotok said the Fed is taking the right steps to help unfreeze the banking and credit markets. "This is exactly what the Fed should do," he said. "This is how the Fed is breaking the logjam of seized credit markets. They will persist until they succeed."
Gregory Drahuschak, analyst at Janney Montgomery Scott, said it may take more to clean up the mess in financial markets caused by trillions of dollars of mortgage loans repackaged and sold to global investors. "Perhaps the ultimate resolution to the problem might have to come from some governmental action not unlike what was done in the early 1990s with the formation of the Resolution Trust that was aimed at solving the savings and loan problems - many of which were very similar to today's major issues," he said.
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