Official news of recession sends markets reeling

Dec 02, 2008 (Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) -- LEH | Quote | Chart | News | PowerRating -- A recession that a panel of experts now agrees started last December showed no signs of loosening its choke-hold Monday, sending the Dow Jones industrial average on a nearly 700-point skid -- the index's fourth-worst point drop in history.

The nonprofit National Bureau of Economic Research said Monday it pegged the start of the recession to a year ago, which already makes it longer than the 10-month average of recessions since the end of World War II.

"I was hoping that it was going to be kind of an average recession, which would mean we'd be getting out of it right about now," said Jay Mueller, a portfolio manager for Wells Fargo Advantage Funds in Menomonee Falls, who for months has been saying the downturn began in December. "Unfortunately, that is unlikely to be the case."

Confirmation that the nation has been in a recession all year, combined with a Commerce Department report that construction spending dropped by a bigger-than-anticipated 1.2% in October and news from the Institute for Supply Management that manufacturing activity hit a 26-year low in November, scared already-wary investors. All three of the major indexes lost more than 7% Monday. The Dow shed 679.95, or 7.7%, to close at 8,149.09; the Standard & Poor's 500 Index gave up 80.03, or 8.93%, to finish at 816.21; and the Nasdaq Composite Index lost 137.50, or 8.95%, to end at 1.398.07.

After Monday's sell-off, which came after a strong rally last week, the Dow is down 38.57% for 2008, while the S&P has decreased 44.41% and the Nasdaq has lost 47.29% for the year.

"I think investors are just realizing this isn't going to end quickly," said Sara J. Walker, senior vice president and investment officer for Associated Wealth Management in Milwaukee.

Rebound next year?

Precisely when a rebound will occur is difficult for economists to say, but many now forecast an upturn for roughly the middle of next year. That would make this recession, which features a dogged housing slump and credit crisis, the longest-lasting since the Great Depression, according to data from the National Bureau of Economic Research.

Michael Knetter, dean of the Wisconsin School of Business at the University of Wisconsin-Madison, is among those who think the Gross Domestic Product is likely to turn upward again in mid-year 2009.

"And I think a lot of that hinges on the new administration restoring confidence to the financial markets and restoring enough confidence in consumers that they don't all feel like they have to repair their household balance sheets immediately," Knetter said.

Consumer spending accounts for about 70% of the economy, and consumers -- concerned about having jobs and cutting costs -- have been scaling back on spending.

Not everyone is so sure that a recession began last December. Officially, at least, there haven't been two consecutive quarters of negative GDP, which is the traditional definition of a recession. But some say the National Bureau of Economic Research uses more-precise data, including unemployment figures, to pinpoint when recessions begin and end.

Economist Clare W. Zempel of Zempel Strategic in Fox Point noted that while the economy undoubtedly was softening this year, it didn't take a real nosedive until September, when the investment bank Lehman Brothers Holdings Inc. collapsed.

He said the severe downturn that occurred this fall after Lehman fell might be similar to a credit scare in 1980 that shocked the economy into a tailspin.

"What we could have would be a short, deep slide that starts to taper off relatively soon," perhaps in the first quarter, Zempel said.

No magic formula

Mueller, who also is an economist, said he thinks the nation will spend "another quarter or two -- and hopefully no longer" in recession.

Not a big believer in stimulus from the government having a lasting effect, Mueller said the catalyst for a turnaround will be when people begin to see that things have fallen so far that there is money to be made at reduced risk. That goes for the stock market as well as in business.

"There isn't any kind of magic formula that suddenly flicks a switch. It's just a matter of time and distance," Mueller said. "You get things bad enough, and the risk-takers look at the proposition and say, 'Look, at this point I have very little downside and I've got a ton of upside. So I'm going to take a flier on it.' Some people will be in too early. Some will wait for the turn, and they will miss the first half-year of recovery."

Although consumers have been cutting back, one thing many economists agree could help keep spending from fizzling altogether is the reduction in oil prices. The drop from $4-a-gallon gasoline to less than $2 a gallon is almost like a major tax cut to consumers, they say.

Reduced gas prices actually have the potential to be a far more potent stimulus than the $600 checks the federal government distributed last summer in its effort to keep consumers spending and stave off a recession.

"Consumers will feel that," Walker said of the monthly savings on gasoline costs. "Now they just have to be encouraged to spend some of it."

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