WASHINGTON — The worst fears of consumers, investors and Washington officials were confirmed on Friday, as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.
In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.
Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.
In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation’s banking system this month — with more to come after that — by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.
Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.
“Godot has arrived,” wrote Edward Yardeni, who had been one of Wall Street’s most relentlessly upbeat forecasters. “I’ve been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy.”
The convulsions in the credit markets were spurred in part when Thornburg Mortgage, one of the nation’s biggest independent mortgage lenders, and Carlyle Capital, the offspring of one of the country’s largest private equity firms, failed to meet demands by lenders to post more cash or pledge other assets, also known as margin calls, on debts that had been backed by packages of mortgages.
Fed officials said Friday that they were not pumping money into the system in response to the poor jobs data but rather to the growing unwillingness or inability of investors to finance even routine business deals. Fed officials have long feared that anxiety about credit losses would create a “negative feedback loop,” or self-perpetuating spiral of rising unemployment, more home foreclosures and yet more credit losses.
“You have big credit losses that make it harder to get new credit, which means the economy starts to slow down and foreclosures go up,” said Nigel Gault, a senior economist at Global Insight, a forecasting firm. “Then you get even bigger credit losses, which makes banks even less willing to lend and you keep spiraling down.”
The Fed’s problem is that its main weapons against a downturn — lower interest rates and easier money — are ill suited to a crisis that stems from collapsing confidence about credit quality.
Even though the central bank sharply cut short-term interest rates twice in January and clearly signaled that it would cut them again on March 18, rates for home mortgages have risen and rates for many forms of commercial loans have jumped sharply.
“There has been a tug of war under way between deteriorating credit conditions and monetary policy,” wrote Laurence H. Meyer, a former Fed governor and now a forecaster at Macroeconomic Advisers. As a result, he said, credit conditions have remained almost as tight as ever.
The darkening economic outlook, coming just nine months before presidential elections, puts enormous pressure on President Bush and could pose a problem for Senator John McCain, the presumptive Republican nominee for president. Typically, the party in power has not been able to hold onto the White House when the economy is in a recession in an election year.
President Bush, in a hastily arranged appearance before television cameras on Friday afternoon, acknowledged that the economy had slowed but predicted that it would get a lift this summer from the $168 billion stimulus package of tax rebates and temporary tax cuts that Congress recently passed.
“Losing a job is painful, and I know Americans are concerned about the economy,” Mr. Bush said.
“The good news is, we anticipated this and took decisive action to bolster the economy, by passing a growth package that will put money into the hands of American workers and businesses.”
Edward P. Lazear, chairman of President Bush’s Council of Economic Advisers, said the White House had downgraded its earlier forecasts but still believed that the tax rebates of up to $1,200 for many families will help the economy escape a recession.
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Source: http://www.nytimes.com/2008/03/08/business/08econ.html
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