The US economy may have slid into a recession, and the risks are growing for a long and deep downturn, economists said.
The darkening assessment followed yesterday's Labor Department report that US employers cut more than 60,000 jobs last month, the biggest decline in nearly five years and the second consecutive month of job losses. Without government employment, the picture would have been worse. Private employers cut payrolls by 101,000 jobs in February, the third consecutive month they cut jobs.
The job market's deterioration comes as oil prices climbed this week to a record $105.47 a barrel. Meanwhile, the Mortgage Bankers Association reported a record number of American homes went into foreclosure the last three months of 2007, and the Federal Reserve said homeowner equity, battered by sliding home prices, fell to the lowest level since World War II. This all means a tighter squeeze on consumers, who are likely to pull back on spending, which drives about 70 percent of the US economy.
Stock prices, too, continued their slide. The Dow Jones industrial average shed 146.70 points yesterday, closing at 11,893.69, the lowest since October 2006.
"It's a very toxic mixture," said Nigel Gault, chief US economist at Global Insight, a Waltham forecasting firm. "Things are go ing to get worse in the immediate future."
President Bush, reacting to the unexpected job losses, yesterday acknowledged economic activity has slowed. But he said the recently approved package to stimulate the economy, primarily through tax rebate checks to most Americans, will provide a "booster shot." In addition, aggressive interest rate cuts by the Federal Reserve will provide a further lift.
Economists expect the Fed to cut rates again, perhaps by three-quarters of a point, when policy makers meet March 18. The Fed has already cut the benchmark rate by 2.25 points since September, to 3 percent, the lowest level in nearly three years. Many economists forecast that the rate, which influences just about every other borrowing rate, will fall to 2 percent or lower before the Fed is done cutting.
Lower interest rates aim to stimulate the economy by reducing borrowing costs, which encourage businesses and consumers to borrow and spend. But the impact of rate cuts has been blunted by the so-called credit crunch as banks, many sustaining huge losses from rising defaults in risky mortgages known as subprime, have become reluctant to lend.
"The rate cuts are setting the stage for better times later, but they can't deal with the credit crunch going on," said Allen Sinai, chief economist at Decision Economics Inc., a Boston financial market advisory firm. "We are in a very dangerous situation that the downturn won't be mild and short, but long and deep."
A recession is defined as several consecutive months of broadly declining economic activity. As a result, it won't become clear whether the country is in a recession until several months after it has started. Many economists say the recent stream of bad economic news makes it almost certain the United States is in a recession. It may have started in December.
Yesterday's employment report represents the strongest evidence of a recession yet, economists said.
Job losses were broad, spread across construction, manufacturing, financial services, retail, and professional and business services. The unemployment rate slipped to 4.8 percent from 4.9 percent, but the decline was driven by a shrinking labor force, a sign that workers are becoming discouraged and no longer looking for work.
The Labor Department only counts people as unemployed and in the labor force if they actively look for work.
The deteriorating job market is particularly worrisome because historically job loss is the main reason homeowners end up in foreclosure, economists said. If job losses accelerate, it could send record-high foreclosures even higher, sparking a cycle in which foreclosures weaken the economy, leading to more job losses, which lead to more foreclosures.
"The difference between a slow growing economy and recessions is you descend into self-reinforcing negative cycles in which these things feed upon themselves," said Mark Zandi, chief economist at
Representative Barney Frank, Democrat of Newton and chairman of the House Financial Services Committee, said the recent job losses show the federal government must move aggressively to stem the foreclosure crisis.
"If we do not act promptly and effectively, as the very disappointing employment numbers indicate, we will face a slowdown that is far worse than appeared six weeks ago," he said in a statement.
Not all economists believe a recession is here. Rich Yamarone, director of economic research at Argus Research Corp. in New York, said the dip in the unemployment rate and an increase in credit card borrowing reported yesterday by the Fed, show the job market and consumers still have some staying power.
"Not all the economic data suggest a recession," Yamarone said. But, he conceded, "That's getting harder to defend."
Robert Gavin can be reached at rgavin@globe.com.
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