Will the Crisis Cause (or Deepen) a Recession?

Dramatic financial developments overwhelmed economic data reports in the news last week. It wasn't just a case of the former drowning out the latter, though; we really had a light week for formal economic data. The estimate for second-quarter real GDP growth in the U.S. was revised downward to an annualized 2.8% from the previously estimated 3.3%. A 2.8% annualized growth rate is in line with the average rate in real GDP growth since World War II. But the weakness we've had in employment, retail sales, housing, light vehicle sales, and consumer confidence measures this year all continue to suggest that a significant slowing in economic growth has been under way.

Will the financial crisis cause a recession, with or without government action? We have quite likely already been in a recession, even with the apparently positive GDP data. We've had eight consecutive monthly declines in payroll employment in the U.S., and we've never had a string like that without a recession being under way. The dramatic decline in housing construction in the past two years is at least as bad as the average decline during a recession, and it reflects (and causes) broader weakness in a variety of sectors, like appliances, that are sensitive to housing activity. Light-vehicle sales have fallen at an accelerating pace in recent months, while initial claims for unemployment insurance have been climbing significantly higher. Surveys continue to suggest consumer confidence resides at recessionary levels as well.

What do we have to look forward to this week? The most important number coming out may be a revision. The Bureau of Labor Statistics releases its monthly employment report this coming Friday (Oct. 3). In this report the BLS will announce a preliminary estimate for the annual benchmark revision. This will impact the data reported for payroll employment over the past year. Yes, this will be a forecast of a revision to past data. A mouthful, but we may be getting a significant downward revision to the payroll data, and this will be worth watching. As a wise person once asked after being told of a massive revision to employment data during a recovery from the 1991-1992 recession (a revision he was told could not have been predicted), "It sure is interesting how these economists can't predict what happened to employment last year."

The monthly employment report on Friday may provide the most important news of the week, but we have a lot of other data coming out as well.

Consumer. The Conference Board's survey of consumer confidence comes out on Tuesday, and automakers report monthly sales on Wednesday.

Labor Markets. The BLS employment report on Friday won't be lonely this week. The Challenger, Gray and Christmas review of corporate layoff announcements comes out on Wednesday, and Monster.com's regular report on online employment advertising comes out on Thursday, along with the regular weekly report on unemployment insurance claims.

Purchasing Manager Surveys. The valuable monthly surveys of purchasing managers conducted by the Institute for Supply Management come out this week; the survey for manufacturing firms comes out on Wednesday, and the survey for services firms comes on Friday. They will provide useful updates on activity trends as well as inflation.