Bangkok--12 Feb--Standard & Poor's Anything But Super While votes from the primaries on Super Tuesday will help shape the next election, economic data continue to suggest that a recession may be waiting for the new president’s arrival. The likelihood of a recession remains at 60%, and rising. The slew of economic releases this week included: - The January Nonmanufacturing Report on Business from the Institute for Supply Management (ISM) plunged to 44.9 in January from 53.2, 53.0 was expected. - Eurozone services activity grew slowly in January to 50.6 from 53.1 in December. In contrast, the U.K. services activity rose to 52.5 in January, from 52.4 in December. - U.S. factory goods orders climbed 2.3% in December, above the 1.7% increase in November and up 6.1% over last year’s 4.9%. Shipments fell 0.3%, while inventories rose 0.8%. - December wholesale trade inventories surged 1.1%. Wholesale sales fell 0.7%. - December U.S. consumer credit rose $4.5 billion. November surged $17.1 billion (revised from $15.4 billion). Revolving credit rose $2.1 billion, while nonrevolving was up $2.4 billion. - The U.S. preliminary fourth-quarter productivity growth rose 1.8%, after surging 6.0% the prior quarter and well above the 0.5% that markets had expected. Unit labor costs rebounded 2.1% after declining 1.9% previously. - The January Senior Loan Officer Opinion Survey from the Federal Reserve indicated that residential mortgage standards remain extremely tight, but the survey indicated that banks are tightening standards for a broad range of loan types, not just housing. - The Bank of England (BoE) cut rates to 5.25% from 5.5% Thursday. The European Central Bank (ECB) left the refi rate unchanged at 4.0%. Both were expected. - U.S. initial jobless claims fell 22,000 to 356,000 in the week-ended Feb. 2. Continuing claims jumped 75,000 to 2.785 million in the week-ended Jan. 26. The insured unemployment rate rose 0.1% to 2.1%. Holiday distortions were a factor, though the uptrend is a concern. - Oil prices rose to $90/bbl (West Texas) on Friday. - The 10-year Treasury yield edged down to 3.7%, and remains well below the 4.25% in early December. The dollar strengthened to $1.45/euro but weakened to 106.8 yen. Stock prices dropped sharply after a disappointing ISM services reading and hawkish Fed comments. Services Finally Disappoint The nonmanufacturing ISM survey plunged to 44.6 in December from 53.2 in January. The report is now at its lowest level in the 10-year history of the series, showing that weakness in the economy coupled with increased costs hurt the services sector. Most of the questions in the survey showed declines, interestingly. New orders, employment, and prices all dropped, but all remained above 50, indicating growth. In contrast is the manufacturing survey, which jumped a surprising 2.3 points to 50.7 and back over the 50-point benchmark, indicating growth in the sector. Nevertheless, the weakness in the overall report suggests that services may no longer offset any possible weakness in manufacturing as it did previously.Factory orders and shipments both jumped 2.3% in December, after a 1.7% rise the prior month. December durable goods orders were revised to a still-strong 5.0% from 5.2%. The report suggests that the manufacturing sector may be in better shape than we thought. Wholesale inventories surged 1.1% in December, while sales fell 0.7%. The strength of recent inventory data suggest that the 0.6% growth reported for the fourth quarter will be revised upward when next reported on Feb. 28. Several other reports, notably trade, will be released before the revision, but now it appears that the Bureau of Economic Analysis was too pessimistic on its assumptions for the end of the quarter. Productivity was stronger than expected in the fourth quarter, with nonfarm business output per hour rising at a 1.8% annual rate after the revised 6.0% surge reported for the third quarter. Productivity growth was not revised because of last Friday’s downward revision to payroll employment. Benchmark revisions will be incorporated on March 5. Always, we look at the 12-month increase rather than the quarterly growth rate because of the data’s volatility. Productivity is up a healthy 2.6% for the four quarters of 2007, much stronger than the 0.9% reported for 2006. Productivity growth over the past year is the same as the 2.6% average gain over the past 25 quarters of solid cyclical productivity growth, indicating that the feared weak productivity growth, seen last year at this time, has not yet arrived. The Fed will also be relieved to see the cost data. The 3.7% increase in hourly compensation decelerated to a 3.7% pace over last year, down from the 5.7% pace in the third quarter, which largely accounts for the 1.0% modest rise in unit labor costs over the past four quarters. The compensation increase is a bit stronger than the 3.3% rise in employment costs reported last week for the same period. A discrepancy occurred last year, which was largely revised away when the data were rebenchmarked. A similar revision to the 2007 data reduced the discrepancy this time around, in part because of the employment data, but also because core inflation has not accelerated. If the data are correct, the moderation in unit labor costs suggests more-tame core inflation and continuing evidence that the Fed can leave inflation concerns on the back burner for now. Way Back When Speaking before the Birmingham Rotary Club, Federal Reserve Bank of Philadelphia President Charles Plosser, a voting member of the Federal Open Market Committee (FOMC) this year, emphasized the importance of keeping inflation in check, even though he recognized growth concerns. Plosser didn’t forecast a recession, though expected ’quite weak’ growth of around 1% (annualized) over the first half of the year, which will gradually pick up over the second half to return to trend growth in 2009.He said that ignoring inflation risk and focusing instead on restoring economic growth by “dramatically driving interest rates down as far and as rapidly as possible", which he called a "damn the torpedoes, full speed ahead" approach to policy risks, could undermine our ability to achieve economic growth over the long run. The Fed president also said that he doesn't agree with conventional wisdom that slower growth automatically leads to lower inflation, recalling the 1970s. Dallas Fed president Fisher said that the economy could growth less than 1% for a couple of quarters, and that while this is worrisome, it remains manageable and that it is too early to decide what to do at the March FOMC meeting. Fisher defended his dissent last week by saying that he saw no easing of inflation or inflation expectations from current high levels and believed that steps already in place, once they took effect, would help mitigate risks to growth. San Francisco Fed President Yellen said that it is most probable that the U.S. will avoid a recession. Still, she went on to say, "current indicators point to continued anemic growth for at least the first half of this year as well as significant downside risks even to those weak expectations." With prospects unusually uncertain, the Fed must be prepared to act in a timely manner. Inflation concerns are rising among some Fed officials, indicating that the magnitude of their next move may be contentious. The most important guidance will come next week when Fed Chairman Bernanke testifies before the Senate. We still expect that the Fed will cut rates by another 50 basis points (bps), to bring the federal funds rate to 2.5% by spring. However, the Fed’s more hawkish talk increases chances of a 25 bps cuts at each of the next two meetings, rather than one cut in March. The Rest Of The World Across the ocean, economic data were not pretty. Eurozone services activity grew slowly in January, to 50.6 from 53.1 in December and below an expected decline to 52.0. In contrast, the services Purchasing Managers Index for the U.K. rose to 52.5 in January, from 52.4 in December and a bit stronger than the decline to 52.0 that markets had expected. German export orders dropped sharply in December, accumulating evidence of slowing economic growth in the Eurozone. German manufacturing orders declined 1.7% in December over the prior month, the biggest decline in five months. Domestic orders this month also slipped, but by a more moderate 0.5%.Central banks noted the slowdown, but took different actions. The BoE's Monetary Policy Committee cut rates to 5.25% from 5.5% Thursday, as expected. The bank noted that business surveys have indicated that the economy is slowing, but that upside risks to inflation remain. The ECB left the refi rate unchanged at 4.0%, which was also expected. ECB's President Trichet repeated that risks to growth are on the downside, but that inflation risks are on the upside and that the ECB continues to monitor developments carefully. Overall, the ECB is slightly less optimistic on growth, but remains hawkish on inflation. 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