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Now it’s official. On Dec. 1, the Business Cycle Dating Committee of the National Bureau of Economic Research—the widely acknowledged arbiters of when the U.S. economy enters and exits economic downturns—pegged the start of the current U.S. pullback to December 2007. And as if to hammer the point home, investors eyed reports on manufacturing and construction released on Dec. 1 that revealed contracting activity in those key sectors of the U.S. economy, including the lowest reading on the Institute for Supply Management’s (ISM) manufacturing index since 1982.

Investors clearly didn’t like what they saw, and the gloomy data—along with continued uncertainties about U.S. holiday retail spending and a cautionary note on U.S. consumer credit from Oppenheimer analyst Meredith Whitne —helped spark a sharp stock market sell-off (BusinessWeek.com, 12/1/08) on Dec. 1.

BusinessWeek and S&P MarketScope staff on Dec. 1 compiled the following insights from Wall Street economists and analysts:

National Bureau of Economic Research

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, Nov. 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. It determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

A recession is a significant decline in economic activity spread across the economy and lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economywide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.

David Greenlaw and Ted Wieseman, Morgan Stanley

The manufacturing sector is now in the grips of a major recession—and conditions are likely to get a good deal worse before they get any better. ISM data were about as we expected but weaker than consensus. The composite manufacturing ISM index fell a further 2.7 points in November, to 36.2, another new low since 1982. The key orders (27.9, down from 32.2), production (31.5 vs. 34.1), and employment (34.2 vs. 34.6) gauges all extended their recent collapses to fall deeply into recessionary territory. Weakness in orders has been particularly pronounced, with the abyss hit in November exceeded only in two prior months, both in 1980.

The weakness was again broadly based across industry groups. The only industries reporting expansion in November were apparel and paper products. The prices-paid gauge slipped all the way to 25.5—the lowest reading since 1949. As recently as June, the price gauge was at 91.5, the highest since 1979. There has never before been such a massive collapse over such a short period that has come anywhere near what has occurred in this episode. Domestic activity has now deteriorated into a severe contraction, and exports are now starting to show some major softness as the U.S. recession goes global. An inventory overhang is also starting to become more apparent.

Michael Englund, Action Economics

The U.S. construction spending report revealed the largely expected 1.2% drop in October, though the decline followed surprisingly firm nonresidential construction figures since July, given big upward revisions, alongside massive upward revisions in prior "home improvement" assumptions for the third quarter that sharply raised the construction trajectory into October.

The silver lining for the day’s data was a round of large upward revisions to the prior construction figures for nonresidential construction, and home improvement, that have reintroduced remarkable resilience to the seemingly indestructible nonresidential sector. We continue to assume a decline for real nonresidential construction in the fourth quarter given widespread anecdotal evidence of deterioration, but there is notable risk that the sector will continue to “muscle through” the end of the year before turning south in the first quarter.

Meredith Whitney, Joseph Mack, and Kaimon Chung; Oppenheimer

Lower liquidity will continue to translate into lower home prices. Reduced liquidity has driven housing prices down more than 23% from the peak, and given the current liquidity trends, we expect prices to fall a further 20% from current levels.

Specific to the credit-card industry, we believe that well over $2 trillion of credit lines will be pulled during the next 18 months. This will be the result of risk aversion and funding challenges, but also of regulatory and accounting changes. The severe consequence of this cannot be overstated. While just over 70% of U.S. households have credit cards, more than 90% of those households revolve credit at some point during the year, or in other words use credit-card lines as a cash-management vehicle. Note that about half of credit-card users revolve every month. We view the credit card as the second key source of consumers’ liquidity, the first being their jobs. Pulling credit at a time when job losses are increasing by over 50% year on year in most key states is a dangerous and unprecedented combination, in our view.

Lorraine Maikis, Merrill Lynch

We are projecting a [November comparable-store] sales decline of 11.9% for the specialty retail group, compared with a 2.1% decrease last year; and a 13.8% decline for the department stores vs. a 12.1% increase last year. Note that the department store group was helped by the retail calendar shift last year, while most specialty retailers reported composite figures that adjusted out the shift.

We believe consumers remained spooked by market turmoil and refrained from shopping during the month. We are projecting one of the weakest holiday shopping seasons on record. In November, our specialty retail stock index fell 23%, and our department store index fell 26%. The indices are now down 47% and 50% year-to-date and 57% and 68% from their peaks in April 2007. We remain generally cautious on the fundamentals of the group.

U.S. stocks finished higher Wednesday in a see-saw session marked by countering bouts of bargain hunting and profit taking.

Earlier in the session, major indexes sank on a fresh batch of dismal U.S. economic news — including reports on private employment and the outlook for the service sector — marking a partial reversal of Tuesday’s closing market gains.

Indexes turned higher near midsession, only to reverse course after the release of the Federal Reserve’s Beige Book report of economic conditions Wednesday afternoon renewed investor uncertainty about the economy and the market’s prospects for heading higher. But the bargain hunters stepped back in late in the session to push indexes back into positive territory.

Gains in defensive issues (Coca-Cola Co. (KO), McDonald’s Corp. (MCD)), biotechs (Genzyme Corp. (GENZ), Gilead Sciences (GILD)), financials (Morgan Stanley MS, Merrill Lynch MER), retailers (JCPenney (JCP)), and homebuilders (Toll Brothers (TOL) offset declines in commodities issues (Alcoa (GS)).

Traders also weighed glum earnings news from Research in Motion Ltd. (RIMM), and word from Freeport-McMoRan Copper & Gold (FCX) that it was lowering production and suspending its dividend.

Bonds were higher. The dollar index was higher. Gold futures were off. Crude oil futures turned lower.

European equity markets finished higher Wednesday, with major indexes higher by 1.07% in London, 0.44% in Paris, and 0.78% in Frankfurt. Markets in Asia closed with gains, with Tokyo stocks rising 1.79%, Hong Kong higher by 1.36%, and Shanghai climbing 4.01%.

On Wednesday, the Dow Jones industrial average finished higher by 172.60 points, or 2.05%, at 8,591.69. The broad S&P 500 index added 21.93 points, or 2.58%, to 870.74. The tech-heavy Nasdaq composite index rose 42.58 points, or 2.94%, to 1,492.38.

On the New York Stock Exchange, 21 stocks were higher in price for every 11 that declined. The ratio on the Nasdaq was 17-11 positive.

Research in Motion said it sees third-quarter revenue of $2.75 billion-$2.78 billion, vs. its previous forecast of $2.95 billion-$3.10 billion due to foreign currency effects and lower-than-estimated unit shipments of existing products. The company cut its 89 cents-97 cents third-quarter EPS forecast to 81 cents-83 cents (adjusted), which excludes the negative impact on its tax rate due to forex.

Freeport-McMoRan Copper & Gold (FCX) announced reductions in copper production and sales of 200 million pounds in 2009 and 500 million pounds in 2010 in response to the recent sharp decline in copper and molybdenum prices. The company also announced that it has suspended its stock dividend in response to weak conditions in commodity and financial markets.

General Motors (GM) submitted its restructuring plan to Congress; the automaker says 22 of 24 new vehicle launches in 2009-12 will be more fuel-efficient cars and crossovers. GM sees full compliance with the 2007 Energy Independence and Security Act; a reduction in brands, nameplates, and retail outlets; full labor cost competitiveness with foreign manufacturers in the U.S. no later than 2012. The company intends to achieve further manufacturing and structural cost reductions through increased productivity and employment reductions; and a balance sheet restructuring, supplementing liquidity through Federal assistance.

Goldman Sachs Group (GS) is weighing whether to launch an Internet banking operation, according to people familiar with the situation cited in a Wall Street Journal report. If Goldman goes ahead, the new unit will seek deposits that can be used to fund various businesses now that Goldman is a bank-holding company. The possible online bank hasn’t been named yet, and many details of its operating plans are undecided. It is likely to offer a range of savings products, such as certificates of deposit, people familiar with the matter said.

American International Group (AIG) said that a financing entity created by the Federal Reserve Bank of New York, designed to mitigate AIG’s liquidity issues in connection with its credit default swaps and similar derivative instruments (CDS) written on multi-sector collateralized debt obligations (CDOs), has been launched. The new entity is designed to buy CDOs on which AIG Financial Products Corp. (AIGFP) has written CDS contracts; to date, $46.1 billion of such CDOs have been purchased, with a related notional amount of CDS transactions terminated in connection with such purchases.

In economic news Wednesday, the Fed’s Beige Book said that overall economic activity weakened across all Fed Districts, to no one’s surprise. Declines were noted in retail sales, with vehicle sales “down significantly” in most regions. The survey said that tourism spending was “subdued” and that reports on the service sector were “generally negative” while manufacturing activity declined and new orders were soft.

Nearly all Districts said the housing markets remained weak, “characterized by reduced selling prices and low but stable sales activity”. The report also said that commercial real estate markets “weakly broadly”, and that lending tightened for both residential and commercial loans.

The agriculture and energy sectors, bright spots until recently, also softened as commodity prices declined. The survey said that signs of labor market slowing were evident in most Districts, and demand for temporary staff declined. Wage and price pressures were subdued.

The Institute for Supply Management’s U.S. non-manufacturing composite index fell to a new record low at 37.3 in November after dropping 5.8 points to 44.4 in October as the pace of decline in the service sector accelerated (the index was 52.4 a year ago). The business activity index fell to 33.0 from 44.2. Weakness was broadbased: The employment index dropped over 10 points to 31.3 from 41.5. New orders fell to 35.4 from 44.0. Export orders plunged to 34.5 from 50.0. Prices paid were 36.6 from 53.4, less than half of the 84.5 high for the year set in June. The manufacturing and non-manufacturing index was 37.2 versus 43.8 in October.

The U.S. ADP private payrolls survey showed a 250,000 decline in jobs in November after a revised -179,000 in October (-157,000 previously). Construction jobs declined 44,000 on the month and have dropped for 24 consecutive months. Manufacturing jobs declined over 100,000, while service producing jobs fell 92,000.

“The ADP figure of -250,000 for November is actually a tad less weak than we had assumed, though it is certainly in line with the assumption of accelerating job losses in November,” says Action Economics.

The ADP data precede November job figures due Friday from the U.S. government, which also are expected to be weak.

U.S. third-quarter nonfarm productivity growth was revised up to 1.3%, above the median of 0.9% from the preliminary figure of 1.1%. Output growth was revised down to -7.8%, however, from -1.7%, the largest drop since the first quarter of 1991. This left a downward revision in the unit labor cost gain to 2.8% from 3.6%, following a bigger second-quarter downward revision to -2.0% from -0.1%.

Challenger Grey & Christmas reported announced U.S. job cuts climbed 61% in November to 181,700 compared to October and are up 148.4% year-over-year (the largest increase since January, 2002). For the year to date, announced job cuts have totaled 1.057 million, up 46% over the same period last year.

Not surprisingly, notes Action Economics, financial companies paced the declines with over 91,000 in cuts for the month. Retail followed with over 11,000 reductions, with computer and electronic firms adding a combined 15.35,000. Challenger also noted announced hirings rose 3,700 to 11,200.

The Mortgage Bankers’ Assn. reported a record surge in its mortgage applications index, up 112.1% in the week ended Nov. 28 to 857.7 (the highest level since March 21). The spike “suggests the Fed’s latest program of buying [mortgage-backed securities] might just do the trick and unlock the credit markets,” says Action Economics.

In other U.S. markets Wednesday, Treasuries rose modestly on the back of the weak November ISM services report and poor ADP employment numbers. The 10-year note rose 09/32 in price to 109-14/32 for a yield of 3.66%. The 30-year bond was up 12/32 to 125-13/32 for a yield of 3.17%. Treasuries are benefiting from speculation that the Federal Reserve will purchase Treasuries in order to provide liquidity to frozen credit markets.

The U.S. dollar index was higher at 86.94.

January West Texas Intermediate crude oil futures finished the session off 17 cents to $46.79 per barrel after traders more closely examined the U.S. government inventory data. Headlines looked bullish for oil, says S&P MarketScope, with the EIA report showing crude oil supplies fell 456,000 barrels to 320.4 million barrels in the week ended Nov. 28, distillate stocks eased 1.7 million barrels and gasoline stocks dropped by 1.5 million barrels. However, a closer look at the report revealed that the draw was due to weak refinery runs as refiners cut operations, according to Bill O’Grady of Confluence Investment Management. “The whole key to this is consumption. Weak demand from the U.S. and China is particularly concerning,” he says.

February gold futures were lower at $768.80 per ounce.

Among Wednesday’s other stocks in the news, Omnivision Technologies (OVTI) posted a second-quarter GAAP loss of 10 cents per share, vs. 36 cents EPS one year earlier, on a 29% revenue decline. Based on current trends, the company sees third-quarter revenues of $80 million-$100 million, and a GAAP net loss per share of 24 cents-37 cents. Baird downgraded the shares to underperform from neutral.

Infineon Technoilogies AG (IFX) posted a fourth-quarter net loss of €763 million, vs. a €280 million loss one year earlier, on a 2.3% revenue rise. The company notes charges in the fourth quarter in connection with its cost-reduction program. It sees fiscal 2009 first-quarter revenues down 30% compared to the prior quarter, total segment profit negative in the quarter, with a total segment profit margin of negative mid-to-high teens percentage, mainly due to the sharp revenue decrease and low capacity utilization. It sees fiscal 2009 revenues down at least 15% from fiscal 2008, with total segment profit to decrease significantly.

Marvell Technology Group (MRVL) reported third-quarter non-GAAP EPS of 23 cents, vs. 14 cents one year earlier, on a 4.3% revenue rise. Wall Street was looking for EPS of 20 cents-21 cents.

Finally, the National Bureau of Economic Research (NBER) has declared the obvious: The U.S. economy is in a recession. Upcoming economic reports this week will offer more evidence of that, as if any were really needed. The official arbiters of peaks and troughs in the business cycle say the eleventh downturn since World War II began in December 2007.

However, investors are more interested in how severe the recession is, and when will it end. Recent reports show the slump, which started off mild, is now sliding into a much more severe stage.

The government鈥檚 roundup of November retail sales and preliminary data on December consumer sentiment, both due on Friday, will shed light on the biggest factor dragging down the economy: consumer spending. Weak October outlays put real spending on a path to decline at about a 4% annual rate in the fourth quarter, after the third quarter鈥檚 3.7% drop, and November outlays may be even weaker. Already, data show November car sales fell to a 10.1 million annual rate, a 25-year low and down from a paltry 10.6 million October.

Business activity in both manufacturing and services continued to deteriorate in November, according to surveys by the Institute for Supply Management, and not just in the U.S. JP Morgan鈥檚 composite Purchasing Managers Index of global activity plunged in November, suggesting global GDP is contracting at a 2.7% annual rate this quarter. Thursday鈥檚 report on October foreign trade will be an important signpost for how badly U.S. exports will suffer amid the weakening global outlook.

Overall, many economists are still downgrading their U.S. growth forecasts, especially given the sharply worse conditions in the labor markets. Given the NBER鈥檚 December 2007 start date and current expectations for the next few quarters, this recession will very likely be the longest in 75 years. The recessions in 1973-75 and 1981-82, the longest since the Great Depression, each lasted 16 months and came with peak to trough declines in GDP of 3.1% and 2.6%, respectively. Current forecasts generally put the expected depth of the 2007-2009 recession in that ball park.

Despite the gloom, policy efforts will eventually stem the damage. By January, an expected package of fiscal stimulus worth some $500-$700 billion over two years will begin to add about 2 percentage points per year to economic growth. Equally important, the Federal Reserve is pouring billions of dollars into the financial markets. By all signs, the Fed is shifting toward a Japanese-style policy of quantitative easing, meaning it is pumping out more funds to the banking system than needed to maintain it鈥檚 target interest rate. Plus, its plan to make outright purchases of mortgage debt from Fannie Mae (FNM), Freddie Mac (FRE), and the Federal Home Loan Banks has already sharply lowered mortgage rates and set off a wave of mortgage refinancing.

This is easily the most unique downturn in the postwar era, but the slump is also set apart by the massive policy action aimed at reversing it. Those efforts are laying the foundation for at least a modest upturn in economic growth later next year. Right now, though, that鈥檚 a hard sell to shell-shocked investors.

Here鈥檚 the weekly economic calendar, from Action Economics:

Top Economic Reports

Other Reports and Events

U.S. stocks closed solidly lower Thursday, as investors turned cautious after two straight winning sessions and ahead of Friday’s November U.S. employment report, which is widely expected to be weak.

On Thursday, the Dow Jones industrial average finished lower by 215.45 points, or 2.51%, at at 8,376.24. The broad S&P 500 index fell 25.52 points, or 2.93%, to 845.23. The tech-heavy Nasdaq composite index shed 46.82 points, or 3.14%, to 1,445.56.

On the New York Stock Exchange, 23 shares were lower in price for every eight that advanced. The ratio on the Nasdaq was 20-8 negative.

“The stock market suffered a steep slide in late trading that likely reflects profit taking ahead of the jobs data [Friday] morning by those who bought Tuesday and Wednesday,” says S&P technical analyst Chris Burba.

U.S. Treasury issues extended recent gains Thursday as rate cuts in Europe and elsewhere supported speculation of a reduction in the U.S. federal funds rate target, amid ongoing weakness in the global economy. Higher weekly initial jobless claims contributed to that sentiment and raised concerns that the November labor report, due for release tomorrow morning, will show a larger decline in nonfarm payroll jobs than the 300,000 expected by economists.

On Thursday, energy stocks were hit by a sizable drop in crude oil futures. The dollar index fell. Gold retreated.

Equities had held up relatively well for much of the session, notes S&P MarketScope, in spite of dismal retail sales repors for November, job cuts at DuPont (DD), AT&T (T) and certain other corporations, and a a 5.1% drop in October factory orders. But nervousness about the jobs report appeared to grip the market in the final hour of trading.

Meanwhile the Big Three U.S. auto makers — General Motors Corp. (GM), Ford Motor Co. (F), and Chrysler LLC — once again took their case before Congress for a financial bailout.

European markets shed earlier gains to finish with slight losses with major indexes losing 0.03% in London, 0.17% in Paris, and 0.07% in Frankfurt. Asian markets closed mixed, with Tokyo stocks down 1.00%, Hong Kong lower by 0.58%, and Shanghai higher by 1.84%.

The European Central Bank cut its benchmark refi rate by 75 basis points to 2.50%. The cut was larger than the Bloomberg consensus of 50 basis points and the largest the ECB has ever delivered.

“We see the refi rate going down to at least 1.5% in ther first half of next year,” says Action Economics.

The Bank of England cut its benchmark repo rate by 100 basis points Thursday, to 2.00%, in line with market expectations. The central bank said in statement accompanying the rate announcement that liquidity conditions remain extremely difficult, despite moves to boost bank capital and ease funding, and noted that further depreciation is Sterling should have moderate impact on domestic growth slowdown.

Also Thursday, Sweden’s central bank cut interest rates by 175 basis points, while New Zealand’s central bank eased by 150 basis points.

French president Nicolas Sarkozy announced €26 billion of stimulus measures. The aid totals 1.3% of GDP and will lift the French deficit-to-GDP ratio to 3.9% next year, from a projected 3.1% and clearly above the 3% limit laid down in the Maastricht Treaty. The government initially announced a stimulus package worth €20 billion, but there had been reports that this was upped in the light of increased economic pressures. The measures are expected to add 0.6% points to growth next year, according to government estimates and include increased investment spending by state owned companies and additional funding to local governments. The government also pledged to quicken the reimbursement of a sales tax, tax credits on research spoending and corporate profit levies.

In U.S. economic news, U.S. factory orders dropped 5.1% in October, from a revised 3.1% decline in September (-2.5% initially). The entire report was weak. Durable good orders were revised down to -6.9% from -6.2% previously. Orders excluding transportation declined 4.3%. Nondefense capital goods orders excluding aircraft were down 5.0%. Shipments fell 3.2% and inventories slid 0.6%. The inventory-shipment ratio rose to 1.33 from 1.29.

Weekly initial jobless claims fell 21,000 to 509,000 in the week ended Nov. 29 from a revised 530,000 the week before (from 529,000 previously). The four-week moving average continued to climb, however, rising to 524,500 from 518,250, a third straight week above the 500,000 mark. Continuing claims rose 89,000 to 4,087,000 in the week ended Nov. 22, the highest level since December 25, 1982.

“Despite the drop in initial claims last week, the levels remain very ugly and in recessionary territory,” says Action Economics.

The Monster Employment Index fell seven points in November, as further economic uncertainty and workforce reductions continued to weigh on U.S. online recruitment activity. Year-over-year, the Index is down 22%, with U.S. online job availability at its lowest level since 2004.

Federal Reserve Board Chairman Ben Bernanke reiterated the U.S. could buy securities to try to drive down mortgage rates, noting mortgages could be bought in “bulk,” in his prepared remarks on housing, mortgage markets and foreclosures.

Chicago Federal Reserve Bank President Charles Evans said the economy is contracting markedly and it’s hard to judge just how long and deep the current recession will be amid high uncertainty and risks skewed to the downside. He sees the recent drop in consumer spending similar to 1990-92 episodes and sees growth remaining sluggish in 2009 before rebounding in 2010-11. Evans said the Fed must be vigilant in monitoring growth risks after a pronounced slump since late October, given weak labor, business investment, industrial output and consumer spending.

In corporate news Thursday, Bloomberg reports that General Motors and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout. The newswire, citing a person it claims is familiar with the internal discussions, reports that staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy — negotiated with workers, creditors and lenders — could be used to reorganize the industry without liquidation. Many solutions to the automakers’ financial problems are on the table in discussions in Washington and around the country among company officials, lenders, union officials and other interested parties. Negotiations are splintered among small groups, making it unlikely a proposed solution such as bankruptcy would emerge until next week at the earliest, the newswire said.

“[W]e believe the case is being made that risking the failure of automakers in the very short term would be more costly than the price of initial support. Still, we think Congress will want its pound of flesh in the form of concessions from UAW and other stakeholders,” wrote S&P equity analyst Efraim Levy in a note Thursday. “Ultimately, we expect initial funding to be approved, with further funding conditioned on achieving clear financial metrics.”

AT&T said it would cut about 12,000 jobs, about 4% of the company’s total workforce, citing economic pressures, a changing business mix, and a more streamlined organizational structure. The company will take a fourth-quarter charge of about $600 million to pay severance to affected employees. It also plans to reduce 2009 capital expenditures from the 2008 level.

Retailers were in the spotlight Thursday, with the International Council of Shopping Centers, Inc. (ICSC) reporting that November U.S. chain store sales fell by a record 2.7% on a year-over-year same-store basis. Key industry players bore this out. Target (TGT) reported a net retail sales decline of 6.1% for November, with a comparable-store sales decline of 10.4%. Target said results were unfavorably impacted by the loss of seven post-Thanksgiving holiday shopping days compared to November 2007.

Costco Wholesale (COST) posted 5% lower November same-store sales and 3% lower total sales.

Macy’s (M) posts 13% lower November same-store sales and 14% lower net sales. The company reiterated its fourth-quarter same-store sales guidance of down 1%-6%.

But not all the news from the sector was bad. Wal-Mart (WMT) reported 3.4% higher total U.S. same-store sales without fuel, 3.0% higher sales with fuel, and 1.6% higher total company sales. The company motes sales for Walmart U.S. during the November four-week period exceeded expectations.

Merck & Co. (MRK) reaffirmed guidance for 2008 non-GAAP EPS of $3.28-$3.32, excluding certain items, and its guidance for GAAP EPS of $3.45-$3.55. However, the drugmaker expects 2009 top-line growth to be offset by the effects of a volatile global economy, fluctuations in forex markets, and continued challenges for certain key products. Merck sees 2009 non-GAAP EPS of $3.15-$3.30, excluding certain items, and GAAP EPS of $2.95-$3.17.

In other U.S. markets Thursday, the 10-year Treasury note climbed 33/32 to 110-18/32 for a yield of 2.54%. The 30-year bond rallied 61/32 to 127-22/32 for a yield of 3.07%.

The dollar index was lower at 86.30.

West Texas Intermediate crude oil for January delivery plunged $3.12 to $43.67 per barrel, the lowest close since January 2005, as the worsening global recession lowered the fuel consumption outlook. Following the Merrill Lynch energy conference, Merrill energy analyst Erik Mielke said there were “no bulls on the near-term outlook for oil and chemical product demand and margins.”

February gold futures were lower at $776.90.

Among Thursday’s other stocks in the news, Nokia Corp. (NOK) announced that Research in Motion (RIMM) has renewed a multi-year patent license agreement. The agreement covers worldwide use of standards and essential patents for GSM, WCDMA, and CDMA2000 technologies. Financial terms of the deal consist of an up-front payment and on-going royalties payable to Nokia. Separately, Nokia estimates that fourth-quarter 2008 industry mobile device volumes will be lower than previous estimate of approximately 330 million units, and it expects 2009 industry mobile device volumes to decline 5% or more from 2008 levels.

Adobe Systems (ADBE) says it believes it will achieve fourth-quarter revenue of $912 million-$915 million, GAAP EPS of 45 cents-46 cents, and non-GAAP EPS of 59 cents-60 cents.Wall Street was looking for 51 cents. Adobe says the global economic crisis significantly impacted revenues. The company also announced a restructuring plan that will reduce headcount by about 600 full-time positions globally, and will result in expected pre-tax charges totaling $44 million-$50 million (including $28 million-$30 million recorded in the fourth quarter). It sees first-quarter revenue of $800 million-$850 million. Baird downgraded the shares to neutral from outperform.

Cirrus Logic (CRUS) sees third-quarter revenue of $42 million-$45 million, down 8%-14% from a year ago.

Jo-Ann Stores (JAS) posts third-quarter EPS of 40 cents (including a gain), vs. 32 cents one year earlier, on a 1.5% same-store sales drop and flat total sales. The company sees fiscal 2009 same-store sales approximately flat vs. its previously announced range of up 2.0%-3.5%; it cut its 95 cents-$1.05 EPS guidance to 75 cents-85 cents.

Aeropostale (ARO) posted third-quarter EPS of 63 cents, vs. 48 cents one year earlier, on a 7% same-store sales rise and a 17% total sales rise. The company sees fourth-quarter EPS of 84 cents-90 cents, vs. 93 cents (excluding items) last year. Aeropostale reported 5% lower November same-store sales and a 4.5% total sales rise. S&P lowered its EPS estimate and reiterated its hold opinion.

Worthington Industries (WOR) says end-market weakness and the speed and severity of the recent decline in steel pricing has left it with inventory in excess of reduced demand while market values for that inventory have plummeted. As a result, it will be writing down the value of its inventory by about $100 million (pre-tax) as of the end of its fiscal second quarter ended November.

U.S. stocks rallied late in Friday’s session, bouncing back from sharp declines in the morning when a government report showed a steep deterioration in the jobs market. The data provided more signs that the U.S. is heading deeper into recession.

The Labor Department said Friday employers cut 533,000 more jobs in November — the most since 1974. Analysts were expecting 320,000 job cuts. The unemployment rate is up to 6.7% from 6.5% in October.

Investors fear higher unemployment will lead to a more severe pullback in consumer spending, which is a crucial component to helping the economy rebound.

However, by late afternoon, traders had shrugged off those worries and were buying again. Recent extreme volatility in the market has made such midday reversals almost seem routine for stock investors.

On Friday, the Dow Jones industrial average rose 259.18 points, or 3.09%, at 8,635.42. The broad S&P 500 index rose 30.85 points, or 3.65%, to 876.07. The tech-heavy Nasdaq composite index gained 63.75 points, or 4.41%, to 1,509.31.

If the late-day rally had any logic, it might be attributed to a realization that the U.S. is already deep into recession — and thus might be that much closer to a recovery. “It’s deep and it’s painful, but I’m hopeful we’re out of it by the third quarter” of 2009, says Peter Cardillo, chief market economist at Avalon Partners.

Though job losses could continue and the unemployment rate could rise to 7.5% or 8%, Cardillo believes November’s figures are likely to be the climax of job-cutting.

S&P’s MarketScope attributed Friday’s rally partly to bargain hunting and short covering, with technology, retail and financial shares leading the way. On the New York Stock Exchange, 22 shares were higher for every nine losing value. On the Nasdaq, the ratio was 19-9 positive.

Bond prices fell Friday. Energy issues were falling in step with a drop in crude oil prices.

The dollar index moved higher following the huge payrolls drop. Gold futures were lower.

European stocks finished sharply lower after the U.S. jobs report, with major indexes falling 2.74% in London, 5.48% in Paris, and 4.00% in Frankfurt. Asian stocks finished mixed, with Tokyo stocks falling 0.08%, Hong Kong up 2.49%, and Shanghai higher by 0.86%.

The job reductions were the most since a whopping 602,000 positions were slashed in December 1974, when the country was in a severe recession.

October’s job loss count was revised to -320,000 from -240,000, reports Action Economics, and September’s was revised to -403,000 from -284,000, for a net -199,000 revision.

Average hourly earnings rose 0.4% after a 0.3% increase in October (revised from 0.2%). The workweek fell to 33.5 from 33.6 previously. Household employment plunged 673,000. Total private sector jobs declined 540,000, with the goods producing sector dropping 163,000 jobs; manufacturing lost another 85,000 jobs. Construction jobs fell 82,000. Employment in the service producing sector declined 370,000. Government added 7,000.

“Wow, the data are far worse than expected across the board and should be bullish for Treasuries and bearish for stocks and the dollar, but it’s not clear how much upside there still is in Treasuries,” wrote Action Economics analysts in a website posting Friday.

“While we expect the FOMC to cut the funds rate target to 0.5% at the December 15, 16 policy meeting, it we suspect they might also alter their statement to indicate that the effective funds rate will continue to trade below the target as they keep the system flush with reserves,” says Action Economics.

Employers are slashing costs to the bone as they try to cope with sagging appetites from customers in the U.S. and in other countries, which are struggling with their own economic troubles.

President-Elect Barack Obama said Friday the jobs report pointed to the need for more action by the federal government. “There are no quick and easy fixes to the crisis, which has been many years in the making, and it’s likely to get worse before it gets better,” he said in a statement.

The carnage — including the worst financial crisis since the 1930s — is hitting a wide range of companies.

In recent days, household names like AT&T Inc. (T), DuPont (DD), JPMorgan Chase & Co. (JPM), as well as jet engine maker Pratt & Whitney, a subsidiary of United Technologies Corp. (UTX), and mining company Freeport-McMoRan Copper & Gold Inc. (FCX) announced layoffs.

Addding to the economic gloom Friday, the U.S. mortgage delinquency rate rose a record 6.99% in the third quarter, according to a report from the Mortgage Bankers Association (MBA), compared to 6.41% in the second quarter. Loans already in foreclosure increased to 2.97% (from 2.75% in the second quarter), also a record clip. The data show that one in ten Americans are either behind on mortgage payments or had their home in foreclosure last quarter. According to the report, the rise in delinquencies was paced by an increase of loans with payment 90 days or more past due, which increased to 2.2% from 1.83% in the second quarter. Mississippi, Louisiana, Michigan, and Indiana had the highest rates of delinquency, between 11.7% and 9.3%.

Fighting for their survival, the chiefs of Chrysler LLC, General Motors Corp. (GM), and Ford Motor Co. (F) returned Friday to Capitol Hill to again ask lawmakers for as much as $34 billion in emergency aid. GM shares were lower Friday, while Ford shares were higher.

In other U.S. markets Friday, the 10-year note fell 1-12/32 to 109-01/32 for a yield of 2.7% and the 30-year was down 2-01/32 to 126-06/32 for a yield of 3.13%.

January NYMEX crude futures fell $1.83 to $41.84, following the U.S. employment report.

February gold futures were lower at $757.40.

Among other stocks in the news Friday, shares of Hartford Financial Group (HIG) more than doubled after the insurer raised its 2008 EPS guidance to $4.70-$4.90. Hartfod said its operating businesses continue to perform well in a challenging environment, reflecting strong underwriting in property-casualty operations and a sharpening of focus in its life insurance operations. Hartford also noted that the year-end capital outlook for its life and property-casualty operations remains strong.

TRW Automotive (TRW) withdrew its 2008 sales and EPS guidance. The company notes that in recent weeks and subsequent to providing the 2008 full-year guidance on Oct. 30, both actual and forecasted levels of vehicle production in global automotive markets have declined beyond previously forecasted levels.

Yum! Brands (YUM) says fourth quarter-to-date sales trends show system-sales growth of 19% in mainland China, up 8% in YRI (Yum Restaurant Intl.), both on a local currency basis, same-store-sales growth for system of up 4% in mainland China, up 4% in YRI, up 2% in the US (with US company same-store-sales growth of 3%). The company sees 2009 EPS growth of at least 10%, excluding special items.

Alete Inc. (ALE) said it expects 2009 EPS of $2.10-$2.35. The electrical-power generation company says that after 2009, it expects strong annual earnings growth for a number of years due to continuing investments in its utility rate base. Alete also said it expects to increase its dividend when its board of meets in January, 2009.

Brown-Forman (BFB) posted second-quarter EPS from continuing operations of 94 cents, vs. 83 cents one year earlier, on 4.6% higher sales. Due to an estimated 12 cents per share net gain on the expected sale of Bolla and Fontana Candida, the company increased its fiscal 2009 EPS guidance to $3.00-$3.20, which also includes expectation of maintaining year-to-date trends for Jack Daniel’s, Southern Comfort, and Finlandia. The company’s board also authorized the repurchase of up to $250 million of its outstanding Class A and B common shares over the next 12 months.

Sonoco Products (ALE) cut its fourth-quarter EPS forcast of 60 cents-64 cents to 48 cents-52 cents and its 2009 outlook from $2.36-$2.40 to $2.23-$2.27. The company says that its businesses that serve industrial markets are seeing much larger than expected decline in volume and reduced profitability due to significantly slowing global economic conditions. Sonoco will close about 15 plants globally and cut about 700 positions for a cost of about $29 million. Including projected impact of higher pension costs, the company sees 2009 base EPS of $1.95-$2.05; excluding higher pension costs, it sees base EPS of $2.25-$2.35.

Big Lots (BIG) reported third-quarter earnings per share from continuing operations of 15 cents, vs. 14 cents one year earlier, despite a 0.2% comparable-store sales decline and flat total sales. The retailer sees fourth-quarter EPS from continuing operations of 90 cents-99 cents on a comp-store sales decrease of about 2%-4%, and expects $1.79-$1.88 for fiscal 2009 on a comp-store sales rise of about 1%.

Rambus Inc. (RMBS) says, at its request, the U.S. International Trade Commission (ITC) has instituted an investigation regarding infringement of Rambus’s patents by NVIDIA Corp. (NVDA) and other companies whose products incorporate the accused NVIDIA products.

The economy is in a tailspin. The latest salvo of grim tidings came courtesy of the Labor Dept.’s Dec. 5 employment report: U.S. employers slashed 533,000 jobs in November (BusinessWeek.com, 12/05/08), the largest monthly decline in more than three decades. The unemployment rate now stands at 6.7% and the ranks of the jobless have increased by 2.7 million since December. The broadest measure of unemployment (a figure that includes the unemployed, employees laboring part-time, and others barely working) stands at a dismaying 12.5%, or 19.3 million workers, up from 8.4% a year ago, or 12.9 million workers.

Considering all the actions being taken by the U.S. Treasury and Federal Reserve to shore up the economy, the risk that a disinflationary recession deepens into a deflationary depression remains remote. But it isn’t inconceivable.

The New Stimulus Package

To stave off an unwelcome reprise of the 1930s, the incoming Obama Administration and Congress are preparing a large fiscal stimulus package for the New Year. The centerpiece of the new Administration’s initiative to get the economy going again was unveiled in news reports Dec. 6: The largest public works initiative since the creation of the national highway system in the late 1950s.

President-elect Obama highlighted the main components of the planned government investment in infrastructure: A massive effort to make public buildings more energy-efficient; more roads and bridges; upgrading school buildings; extending the information superhighway; and medical care electronic record keeping. It’s increasingly apparent that the Detroit automakers will also get government money to stay alive.

Yet major health-care reform—specifically, universal health care—should top the list. Forget any suggestion that reform is too expensive or that it would take too long to have an impact. Wrong, on both counts. A bold embrace of universal health care offers policymakers the chance at a fiscal triple-play: Universal coverage would stimulate the economy, it would boost the financial security of ordinary Americans, and it would break the health-care reform log-jam.

Rx for a Healthy Economy

To paraphrase and update a famous quote about General Motors (GM), what’s good for health-care reform is good for the economy. (It would certainly be good for General Motors, too.)

The case for long-term reform is compelling. The problems associated with America’s badly frayed health-care system are well known. The country spends a world-beating 16% of gross domestic product on health, yet in international comparisons it lags behind a number of key measures. For instance, the U.S. ranks 29th in infant mortality and 48th in life expectancy. The number of people without health insurance was 38 million in 2007, and that number is guaranteed to have risen in the meantime with the recession that began a year ago. With universal health care, everyone under age 65 would be covered by a qualified health insurance company or through a government-sponsored program. (Those over 65 already have a version of universal coverage through Medicare.)

Universal coverage would boost the economy in the short term. The reason is that the financial side of the health-care equation is deteriorating rapidly for the average American family. Some 41% of working-age adults—72 million people—had trouble paying their medical bills or were paying off accrued medical debt from the past year. (That’s up from 34%, or 58 million people, in 2005.) Taken altogether, in 2007 an estimated 116 million people, or two-thirds of working-age adults, were either uninsured for a time, faced steep out-of-pocket medical costs relative to their incomes, had difficulties paying their medical bills, or didn’t get the care they needed because of cost, according to the Commonwealth Fund Biennial Health Insurance Survey.

Targeting fiscal stimulus toward universal coverage would help ordinary workers rather than Wall Street tycoons. It would also relieve a major source of economic insecurity for anyone handed a pink slip during the recession.

Funding Health Care

For quick implementation, the initial system largely would take bigger and better advantage of existing programs. How much would it cost? Depending on the details, it would take somewhere between $100 billion and $200 billion to require that insurance companies abandon any screening based on preexisting conditions, fund tax credits for employers and workers, open up Medicare to younger folks, boost enrollment in State Children’s Health Insurance Plans, and jump-start other initiatives to get everyone under the universal coverage umbrella.

Dean Baker, an economist and co-director of the Center for Economic & Policy Research has come up with a universal coverage package that would cost $160 billion a year. The main components of his idea: $120 billion in tax credits to employers who cover workers for the first time in 2009 and 2010, a credit for employers that increase their existing coverage, and another $40 billion to reduce the health-care burden on Medicare beneficiaries. (He would also open up Medicare to employers and individuals.)

What’s more, rising health-care spending is not quite the devil it’s often made out to be. The medical industry is among the nation’s most globally competitive sectors. Health care is also a big U.S. employer, with 13.4 million workers. Indeed, even as most industries shrink their payrolls health care has created jobs. For instance, in November health-care employment grew by 34,000 and over the past 12 months the industry has added 369,000 jobs.

The Time Is Now

To be sure, this kind of universal health care isn’t good enough for the long haul. It doesn’t go far enough to create incentives for health-care efficiencies, let alone establish a stable source of funding. But once the economy recovers, Washington can debate how to create a more cost-effective and cost-efficient health-care system. Hopefully, any long-term solution will sever the link between health insurance and employment. It makes no sense that because a company’s profits are down during a recession that a family’s health-care coverage is at risk.

The country has toyed with some kind of national health policy six times over the past 100 years. A key plank in Theodore Roosevelt’s losing Presidential campaign of 1912 was national health insurance. President Harry Truman tried again after World War II with his "Fair Deal." President Clinton’s health-care initiative early in his first term collapsed. The current crisis offers another opportunity to reform the unwieldy, expensive apparatus at last—and give much needed relief to the beleaguered U.S. economy in the process.

The loss of 533,000 nonfarm jobs in November, announced in the Labor Dept.’s employment report released on Dec. 5—after huge revisions to the payroll loss numbers reported for September and October—makes clear that the U.S. economy hit a brick wall in September and has been spiraling downward ever since. The nation’s various economic data will set many post-Depression records during the coming two quarters as the "Great Recession" takes hold. Certainly we are in for a nasty slew of economic reports through the holiday season.

The U.S. jobs report managed to undershoot market pessimism, both with the hefty drop in payrolls, which was the report’s headliner, the downward back-revisions, and a 0.1 hour decline in the average work week, to 33.5 hours. That meant a big 0.9% decline in November hours worked. Hours worked are poised for a -7% pace in the fourth quarter, following the -2.2% third-quarter figure, and we have revised down our fourth-quarter U.S. gross domestic product forecast to an annual rate of -5.0% from -4.0%. This follows a -0.5% rate in the third quarter that looks poised for a small upward revision to -0.3%.

There was some good news, relatively speaking, in the November jobs report that diminished the headline effect from the massive payroll and workweek declines. The jobless rate "only" rose to 6.7%, as a 422,000 drop in the labor force in November mitigated some of the effect of the big 673,000 drop in civilian employment. And hourly earnings rose 0.4% in November, to leave a 4.1% year-over-year gain, restraining the negative impact of the jobs decline on income.

Surge In Unemployment

The jobless rate is still likely to post a big gain in December, and we will assume a 7.0% rate by yearend. The 0.4% hourly-earnings gain offset less than half the effect of the 0.9% drop in hours worked on wage income—but at least these figures didn’t aggravate the effects of the big payroll declines.

It is now clear that we are seeing the sharpest pace of decline for the U.S. economy since the particularly harsh 1980-82 or 1974 downturns, and possibly since the Great Depression. Media references to the "Great Recession" will keep panic alive, both among households and businesses, through the remainder of the holiday season or longer.

It’s unclear when the effects of the massive deleveraging process now under way will start to diminish, but nasty November economic reports to be released through the remainder of December and early January will likely continue to fuel public austerity in the near term.

When it comes to the Federal Reserve’s response, we continue to assume policymakers will lower the 1.00% fed funds rate target at the Dec. 16 Federal Open Market Committee meeting, though the effective rate has already settled in the 0.25%-0.50% range and has little room for downward adjustment. As it did at its Oct. 28-29 meeting, however, we expect the Fed again to chase its tail with a target reduction to the 0.50% area that seems to simply close the gap to the actual rate, though the reduction will likely further depress the effective rate toward zero.

Massive Market Pressure

The real policy questions concern the degree to which—and the aggressiveness with which—the Fed deploys various "quantitative easing" strategies, moves similar to those once deployed by the Bank of Japan. The Fed will be under continuous market pressure to expand its balance sheet and remove paper from the financial markets in exchange for reserve credit, in the hope that it will eventually be able to jump-start the lending process and force credit back into the collapsing economy. The interest rate tool has largely already been fully deployed, given the near-zero fed funds rate, and the massive spreads to private debt instruments are now the primary barrier between lower rates in the reserve market and lower rates for nonbank borrowers.

It will be interesting to see to what degree the Fed attempts to inject such thoughts into the policy statement it issues on Dec. 16. The committee members could seek to tell us where they want the fed funds rate to trade, vs. regurgitating a "target" they have no intention of achieving. With some new verbiage, they might clarify their objectives in expanding the balance sheet, in quantitative terms. Perhaps they could provide a signal that they are willing to do what it takes when it comes to expanding the central bank’s balance sheet.

Yet the FOMC should also seek to describe the economic landscape in a way that inspires confidence rather than further panic—and this might argue against providing too much detail on the awful state of the economy, or the hefty balance sheet expansion that might be necessary.

U.S. stocks closed sharply higher Monday as President-elect Barack Obama’s weekend announcement of the largest U.S. economic stimulus plan in 50 years. The plan, centered around a major planned infrastructure investment, led investors to buy a range of issues, from machinery makers to materials producers. Monday’s stock market rally extended steep gains from Friday.

Also Monday, General Motors (GM) and Ford Motor Co. (F) rallied on media reports that Detroit automakers; were nearing a deal to obtain about $15 billion in federal aid.

Bonds were lower, as was the dollar index. Gold futures surged on news of the proposed Obama stimulus plan. Oil futures were sharply higher.

On Monday, the Dow Jones industrial average finished higher by 298.76 points, or 3.46%, at 8,934.18. The broad S&P 500 index rose 33.63 points, or 3.84%, to 909.70. The tech-heavy Nasdaq composite index gained 62.43 points, or 4.14%, to 1,571.74.

On the New York Stock Exchange, 25 stocks were higher in price for every seven that declined. The ratio on the Nasdaq was 20-8 positive. Trading was moderate. Traders were squaring positions week’s Quadruple Witching expiration of futures and options, reports S&P MarketScope.

European equities rallied, with major indexes climbing 6.19% in London, 7.63% in Frankfurt, and 8.68% in Paris. Asian markets finished solidly higher, with Tokyo stocks rising 5.20%, Hong Kong climbing 8.66%, and Shanghai up 3.57%.

Obama’s pledge to produce the largest economic stimulus plan since the 1950s when he takes office in January in bid to revive economy. He also warned things will be worse before they get better.

The Wall Street Journal reported Monday that the U.S. government could sell more than $400 billion in Treasury notes and bills in the final weeks of the year to cover its soaring funding needs, and it looks like it will continue to get the money on the cheap. “So many horrible things have happened and the economy is in such bad shape. The smart thing to do is to hide in Treasurys,” according to Ward McCarthy of Stone & McCarthy.

Federal Reserve Vice Chairman Donald Kohn said Monday the “challenge for regulators and other authorities is to create an environment that supports greater bank intermediation, which should help to restore the health of the financial system and the economy,” in his brief comments at a Office of Thrift Supervision National Housing Forum. “We want banks to be willing to deploy capital and liquidity, but they must do so in a responsible way that avoids past mistakes and does not create new ones,” he added.

Fed Governor Randall Kroszner said banks need to take a much broader view of investment risk as they dig their way out of the current financial crisis, and mortgage-backed securities need to become simpler and much more transparent. “Not only do banks need to assess counterparty credit-worthiness and behavior on an individual basis, they also need to assess counterparties on a collective basis,” Kroszner told a risk management conference in Geneva. “They need to understand how their own actions to protect positions can put pressure on key counterparties, especially when other market participants are likely to be taking similar action to protect themselves,” he said.

German industrial production fell 2.1% in October, raising the likelihood of a weaker than expected figure for the euro zone, which is due on Friday.

The British Office for National Statistics said output prices fell 0.7% on the month in November. That took the annual rate of output price inflation down to 5.1% last month from 6.7% in October, the lowest since December 2007. The ONS said the fall in output prices was driven by an 8.3% fall in petroleum products.

Apple Inc. (AAPL) shares were sharply higher after a CNBC report that the company confirmed that a version of its popular iPhone will be selling soon through Wal-Mart (WMT), but Apple denied reports that the price for the device will be as low as $99.

In other U.S. markets Monday, the 10-year Treasury note was lower in price at 108-29/32 for a yield of 2.726%, while the 30-year bond was lower at 126-08/32 for a yield of 3.131%.

The dollar index was off 1.10 to 85.80.

January West Texas Intermediate crude oil futures were up $2.21 to $43.02 per barrel on short covering as the energy market looked to recover from recent losses. Crude oil, bolstered earlier this year by speculators and hedge fund excesses, has dropped from a $147.27 high in August. The market was also being aided Monday by strong global stock markets, which gave some hope for increased demand. Also, Saudi Aramco said it will reduce crude supplies to Japan in January for the second month as global demand for fuel slumps. Further, OPEC President Chakib Khelil said the cartel production cuts likely be decided at the Dec. 17 meeting.

February gold futures were higher at $771.60 per ounce.

Among Monday’s other stocks in the news, 3M Co. (MMM) says as a result of economic realities such as an expected 10% decline in fourth-quarter organic volume and the negative effects of currency, it has cut its $5.40-$5.48 2008 EPS guidance to $5.10-$5.15 (excluding items). 3M says forex impacts are expected to reduce 2009 sales 6%-7%, and sees $4.50-$4.95 EPS.

Chesapeake Energy (CHK) says it has further reduced capital spending plans for 2009 and 2010 to achieve a cash neutral budget. The company will build up to $4 billion in additional cash resources in 2009 and 2010 through further asset monetizations. Additionally, the company continues to have talks with multiple parties for either minority investment in its midstream operations or purchase of portion of its existing midstream assets, and expects to complete the midstream deal in the first quarter of 2009. The company will amend the acquisition shelf registration statement to reduce the number of shares to be registered from 50 million to 25 million.

MetLife Inc. (MET) expects fourth-quarter premiums, fees, and other revenues of $7.9 billion-$8.5 billion (vs. $7.7 billion in the fourth quarter of 2007) and $1.50-$2.55 EPS (vs. $1.44 a year ago). The company sees 4%-5% 2009 revenue growth, and $3.60-$4.00 operating EPS.

NYSE Euronext (NYX) says November U.S. cash products average daily volume increased 26%, NYSE listed matched volume increased 14%, NYSE Arca and NYSE Alternext U.S. listed matched volume increased 174%, Nasdaq listed matched volume decreased 4%, exchange-traded funds matched volume increased 94%.

A unit of Walt Disney Co. (DIS) entered into a deal to acquire outstanding shares of Jetix Europe N.V. for €11 per share, which will bring Disney’s ownership of the pan-European kids entertainment co. to about 96%. Following completion of the deal, Disney intends to obtain ownership of 100% of the shares in Jetix, including through statutory buy-out proceedings.

Worthington Industries (WOR) announced actions to reduce its workforce by about 300 employees in its steel processing and metal framing business segments, about 4% of the total workforce. These actions are in addition to the previously announced (October 23) closings and job cuts.

Heelys, Inc. (HLYS) declared a special cash dividend in the amount of $1.00 per share of common stock. This dividend is payable on December 22, 2008 to shareholders of record on Dec. 15, 2008.

According to an Associated Press report, Playboy Enterprises (PLA) said that Christie Hefner, the daughter of founder Hugh Hefner, is stepping down as chairman and chief executive. The company has named director Jerome Kern to serve as interim non-executive chairman while it looks for a replacement. Hefner will stay on as CEO until Jan. 31, 2009, and remain on the board until a new CEO joins the company.

On Fri., Dec. 5, the U.S. Labor Dept. reported the loss of more than a half million jobs during November (BusinessWeek.com, 12/05/08), the largest decline since the 1974-75 recession. In addition, October and September’s jobs data were each revised sharply lower. Finally, the unemployment rate rose to 6.7% from 6.5%.

In addition to the mounting job losses, the National Bureau of Economic Research earlier in the week declared that the U.S. economy is in recession. As expected by S&P Economics, the peak is dated to December 2007, already lasting longer than the average 10 months since World War II.

So far in 2008 the U.S. has lost nearly 2 million jobs through November, putting this year on track as being the worst since 2.1 million jobs were lost in 1982.

Heading into Friday’s trading day, it would have been no surprise if stocks had tumbled, threatening the Nov. 20 closing low on the S&P 500 of 752. Yet the S&P 500 ended up rising more than 30 points. Go figure.

S&P 500 % Price Change During and After Job Declines

Source: S&P Equity Research. Past performance is no guarantee of future results.

Then I remembered some data shared at a recent Investment Policy Committee (IPC) meeting by Rich Peterson of S&P’s Markets, Credit and Risk Strategies group. Not surprisingly, during the year in which job losses mounted, the S&P advanced an average of only 4.7% and fell in seven of 14 observations. In 12 of the subsequent calendar years, however, the S&P 500 posted increases—10 of which were double-digit advances—that averaged 16.6%.

Of course past performance is no guarantee of future results, but the implication is that investors anticipated an eventual economic recovery by buying back into stocks following large declines in employment.

After suffering through a full-year decline of more than 40%, it’s easy to see why some investors believe this bear will envelop all of 2009 as well. We don’t. S&P expects this recession will bottom in mid-2009, after setting a post-war record for duration. S&P’s IPC projects the S&P 500 to close 2009 at 1025, for a 20% rise from the expected 2008 close of 850, on an expected recovery in economic growth from massive government stimulus and a gradual improvement in corporate earnings outlooks.

U.S. stocks closed sharply lower Tuesday as investors took profits — or shifted funds into Treasuries — after two straight winning sessions. Market players got cold feet as optimism about the government’s stimulus plans and progress toward government financing for cash-strapped U.S. automakers was swept away by a wave of poor earnings reports and negative guidance on 2009 profits — and announcements of further corporate layoffs.

Among the well known names posting earnings warnings Tuesday: FedEx Corp. (FDX), Texas Instruments (TXN), and Broadcom Corp. (BRCM).

One telling sign of investor skittishness: Traders on Tuesday flocked to the Treasury Dept.’s $30 billion auction of four-week bills, which were awarded at a zero percent interest rate, with a near record level of demand for the ultra short-term debt. The auction results show that fear has not left the equities markets at a time when some traders thought major indexes had reached bottom, according to S&P MarketScope.

The Treasury’s three-month bill was trading at a negative rate — -0.01% — at one point on Tuesday, notes Action Economics.

Congress and the White House were still battling over loans for the auto industry on Tuesday. Congressional Democrats were seeking votes to pass a conditional $15 billion loan to cash-strapped Detroit automakers.

There was limited reaction to a report that the National Association of Realtors’ pending home sales index fell 0.7% in October. It is not certain that the market will respond to Wednesday’s report on October wholesale inventories, says S&P.

The U.S. dollar index was up. Gold futures were higher. Oil futures were lower.

On Tuesday, the Dow Jones industrial average finished lower by 242.85 points, or 2.72%, at 8,691.33. The broad S&P 500 index was down 21.03 points, or 2.31%, at 888.67. The tech-heavy Nasdaq composite index shed 24.40 points, or 1.55%, to 1,547.34 after spending much of the session in positive territory.

On the New York Stock Exchange, 21 stocks traded lower in price for every 10 that advanced. The ratio on the Nasdaq was 18-9 negative.

European stocks built on Monday’s advance, with major indexes rising 2.06% in London, 1.34% in Frankfurt, and 1.55% in Paris. Asian equity markets ended mixed on Tuesday, with Tokyo stocks up 0.80%, Hong Kong down 1.94%, and Shanghai lower by 2.54%.

Congress and the White House inched toward a financial rescue of the Big Three auto makers Tuesday, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring. Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.

In the case of General Motors (GM), such a move could give the government a large stake in the company and may hurt existing shareholders. GM is seeking about $10 billion in short-term loans and has a market capitalization of about $3 billion. The legislation didn’t specify what kind of stock the government would take, leaving open the option it could be preferred, common, voting or nonvoting. Assuming congressional Democrats and the White House come to agreement on the plan, the car industry would be the latest to submit to strict government scrutiny in return for a bailout, joining most prominently the banking sector.

The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications. House Speaker Nancy Pelosi, a California Democrat, said: “Everybody’s getting a haircut here, in terms of the conditions of the bill,” she said, noting the likely impact on labor, bondholders, shareholders, car dealers, suppliers and executives. “The management itself has to take a big haircut on all of this.”

In a Bloomberg TV interview, Alan “Ace” Greenberg, the former Bear Stearns chief executive officer who is approaching his 61st year on Wall Street, said the investment-banking model he helped pioneer is “gone.” “There’s no more Wall Street,” Greenberg, 81, said. The entire make-up of Wall Street has changed “forever,” Greenberg said. “Rumors can start and turn into a self-fulfilling prophesy,” Greenberg said, adding he’s “never seen anything close” to the current economic decline and turmoil in the financial markets. Firms that specialize in advisory work on mergers and acquisitions are “going to stay in business” as demand for independent opinions grow, Greenberg said.

Shares of FedEx tumbled Tuesday after the package-delivery concern cut its $4.75-$5.25 fiscal 2009 earnings per share (EPS) guidance to $3.50-$4.75, as significantly weaker macroeconomic conditions are expected to offset the benefits from lower fuel prices and the announced departure of DHL from the U.S. domestic package market. FedEx’s outlook assumes stable fuel prices.

Shares of rival United Parcel Service (UPS) were also lower Tuesday.

Texas Instruments lowered its fourth-quarter guidance to EPS of 10 cents-16 cents on revenue of $2.3 billion-$.5 billion from 30 cents-36 cents EPS on revenue of $2.83 billion-$3.07 billion.

Broadcom cut its fourth-quarter revenue guidance to $1.05 billion-$1.10 billion (including the AMD digital TV acquisition) from $1.17 billion-$1.235 billionm (excluding the AMD Digital TV acquisition). Broadcom notes that due to the current global economic environment, customers across each of its targeted end markets requested adjustments in their deliveries in the fourth quarter, resulting in significant pushouts and cancellations since the company originally provided guidance in October, 2008.

Sony Corp. (SNE) will reduce investment in its electronics business by about 30% in fiscal 2010 vs. its mid-term plan, reduce the total number of manufacturing sites by about 10%, reduce headcount in electronics business worldwide by about 8,000, and reduce headcount in its seasonal and temporary workforces.

In economic news Tuesday, the U.S. pending home sales index slipped 0.7% to 88.9 in October from a revised 89.5 in September (89.2 previously). And on a year-over-year basis, sales are down 0.6% versus a 7.9% pace previously. Sales were mixed regionally with a 8.7% drop in the West and a 4.3% decline in the Midwest, vs. a 7.8% increase in the South and a 0.6% increase in the Northeast.

The International Council of Shopping Centers and Goldman Sachs weekly sales index for the week ended Dec. 6 fell 0.8% after rising 0.1% the week before. On a year-over-year basis, retail sales rose by 0.4% after rising 1.3% the week before. “Over the last week, the completion rate of holiday gift-buying fell behind last year and with it holiday spending,” said Michael P. Niemira, ICSC chief economist. “The tough economic and retail environment, which continued into early December, is likely to dominate the full month’s sales performance as well.” The ICSC expects monthly comparable-store sales will be flat to up 1% for December with late holiday shopping driving the month’s overall performance.

Japan’s economy shrank 0.5% in the third quarter, worse than a preliminary reading of 0.1%. As a result, the Yomiuri newspaper reported the government was considering an economic package including spending of up to 20 trillion yen ($216 billion).

The Office for National Statistics said U.K. industrial output fell 1.7% in October, the biggest fall since January 2003.

Germany’s trade surplus, adjusted for seasonal swings, rose to €15.8 billion ($20.43 billion) but forward-looking indicators show foreign demand for German goods has crumbled since the start of the year, and the latest data underlined the weakness of economies such as Britain, Germany’s biggest trading partner.

In other U.S. markets Tuesday, Treasury bonds soared after the Treasury Dept. sold $30 billion of 4-week bills at a yield of zero percent. There were more than $125 billion in bids, resulting in a 4.20 cover ratio. Indirect bidders were awarded 47.2% of the auction, up from 31.7% last week, and the best since early October. These results reflect the high degree of demand for the safety of Treasuries, and especially over the turn of the year. The 30-year bond was up 2-13/32 to 128 at 2:41 pm EST for a yield of 3.053%, 10-year notes were up 29/32 to 109-21/32 for a yield of 2.645%, and the 2-year notes were up 06/32 to 100-26/32 for a yield of 0.846%.

Tuesday’s action suggests the government won’t have much trouble selling billions of Treasurys in coming weeks, according to S&P MarketScope.

The U.S. dollar index was higher at 85.81.

January West Texas Intermediate crude oil futures were lower at $42.81 per barrel.

February gold futures were higher at $774.20 per ounce.

Among other stocks in the news Tuesday, AutoZone Inc. (AZO) posted first-quarter EPS of $2.23, vs. $2.02 one year earlier, on 1.5% lower same-store sales and 1.6% higher total sales. Wall Street was looking for current-quarter EPS of $2.18.

National Semiconductor Corp. (NSM) posted second-quarter EPS of 14 cents, vs. 33 cents one year earlier, on a 15% sales decline. The company sees a sequential third-quarter sales decline of about 30%. National Semi cited “significantly” lower-than-usual demand levels in the post-holiday season, especially for personal mobile devices. The company also expects gross margins to decline as it plans to significantly lower its manufacturing activity in the third quarter.

Toro Co. (TTC) reported fourth-quarter EPS of 8 cents (before a charge), vs. 16 cents one year earlier, despite a 2.6% sales rise. The company sees first-quarter EPS of 15 cents-25 cents, and fiscal 2009 EPS of $2.50-$2.70, which is higher than the Wall Street forecast of $2.41.

Con-Way Inc. (CNW) cut its 2008 EPS from contiuning operations guidance from $2.60-$2.80 to $2.20-$2.35, excluding charges. The company added that since its conference call on Oct. 23, the decline in year-over-year tonnage at Con-way Freight has accelerated significantly as the economy has continued to deteriorate. In response, Con-Way reduced its nationwide workforce by about 8%; the move will result in a charge of about $7.5 million.

Danaher Corp. (DHR) cut its $1.17-$1.25 fourth-quarter adjusted EPS from continuing operations view to $1.03-$1.10. The company sees 2008 adjusted EPS from continuing operations of $4.15-$4.22. Danaher will cut 1700 jobs.

Molex Inc. (MOLX) cut its $750 million-$800 million second-quarter revenue view to $650 million-$670 million. Molex says it is lowering expenses, including headcount and related employee costs. These cost reductions are in addition to the previously announced expense controls and restructuring initiatives. As these actions have not been fully quantified, Molex doesn’t believe it appropriate to provide a December-quarter EPS view at this time.

Wyndham Worldwide (WYN) announced acceleration of its initiatives to increase cash flow and eliminate its reliance on the asset-backed securities (ABS) market by reducing the sales pace and cost structure of Wyndham Vacation Ownership. The company now expects to reduce gross Vacation Ownership Interest (VOI) sales in 2009 to about $1.2 billion from expected gross VOI sales of about $2 billion in 2008 by eliminating sales offices and marketing programs. Wyndham sees a charge of about $50 million-$60 million in the 2008 fourth quarter and $10 million-$15 million in the 2009 first quarter. It now sees total 2009 revenues of about $3.7 billion-$4.1 billion, with adjusted EBITDA of $790 million-$840 million.

Even in the midst of the biggest drop in nonfarm payrolls in 34 years, (BusinessWeek.com, 12/5/08), major U.S. stock indexes rallied on Dec. 5 and extended their gains on Dec. 8. Though the November employment report was grim, investors appeared to be emboldened by President-elect Barack Obama’s promise over the weekend to deliver the biggest government stimulus package seen in 50 years to get the economy moving again.

While stocks have had periodic up-moves in the past few months, efforts to foster a sustainable rally have come up short. The ever-present financial crisis ensures there’s always a fresh batch of grim headlines to dash any hopes that stock prices are close to reaching a bottom. The lack of upward momentum is likely to persist now that the U.S. is mired in a recession that, according to a report released last week by the National Bureau of Economic Research, began a year ago and is projected to be the longest and deepest since 1982.

Still Some Hesitation

Since July 2007, five days is the longest winning streak the large-cap benchmark Standard & Poor’s 500 index has been able to muster before succumbing to selling pressure and heading lower again. The market is well off the 11-year lows of Nov. 20, when the S&P 500 closed at 752.44, and investors seem ready to dive back into stocks. But maybe not totally ready. They’re hesitating amid concerns about how long and deep the global recession will be, says Alec Young, equity strategist at Standard & Poor’s Equity Research. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).) The consensus among economists is for the downturn to end in the middle of 2009, but most investors remain dubious.

"The market will usually look ahead six months. The reason rallies can’t get any traction is there’s still a lot of skepticism" about whether the timetable for a recovery will have to be extended, he says.

There’s more than mere psychology at work here, even though to most casual observers of Wall Street the off-the-charts volatility defies logic, Young says. The trading is all a bet on when corporate earnings can be expected to improve. Investors’ willingness to nibble at stocks at prices above the November lows suggests investors are ready to look to better days ahead.

In the meantime, though, danger lurks, especially with risks to the continued viability of the U.S. auto sector. Investors need coaxing to overcome worries about the possibility of 300,000 to 400,000 auto and auto-supply workers being laid off in the Midwest, says Young.

Against that backdrop, what could get the stock market back on an upward path? Here, BusinessWeek presents five key factors investment strategists say are needed to send equities off to the races again.

1. No More Downward Revisions to GDP Growth
For Alan Skrainka, chief investment strategist at Edward Jones & Co. in St. Louis, a key ingredient for investor confidence is a halt in the downward revisions to economic growth forecasts that the Federal Reserve Board and private economists have been issuing.

"If this quarter is truly the worst quarter and [productivity] will begin to improve sometime early next year, then the stock market may be close to a bottom," he says. "We can’t continue to see lower and lower estimates for growth and we can’t keep pushing out the time frame for recovery."

Before the bottom fell out of the market in October and November, the Federal Reserve had projected an economic recovery for the end of 2008; that prediction has now moved well into 2009. If Bernanke & Co.’s next revision is for still lower growth, it will sink investor confidence, like a company that keeps missing its earnings estimates and keeps forecasting lower profits, says Skrainka.

If predictions for a return to economic growth get pushed out to September 2009, that would postpone a stock market bottom until March, says S&P’s Young. "The opportunity cost of being even a month early [on a recovery bet] in this environment can be 5% to 6%, even in blue chip stocks," he says. "People are seeing how much money can be lost so quickly. Half the losses have been in the last few months."

Bill Stone, chief investment strategist at PNC Wealth Management (PNC) in Philadelphia, says investors’ sentiment could turn positive if we start to see a slower rate of decline in the economic data. "You’re seeing acceleration to the downside now," with GDP currently expected to drop 5% in the fourth quarter after a preliminary reading of a 0.5% decline in the third quarter.

Merrill Lynch’s (MER) prediction last week that oil prices could drop to as low as $25 a barrel next year on falling world demand feeds investor pessimism in the same way, since the suggestion of protracted weakness in the global economy doesn’t inspire much confidence in corporate profits, says Young.

The way out of a recession is typically created when prices for certain items and the cost of borrowing become low and attractive enough to entice consumers into buying and borrowing again, says Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs (GS). "I do believe this will be a thornier problem than in previous recessions," requiring more time for the automotive and housing industries to rebound.

2. An Enormous Government Stimulus Package
As Obama’s remarks over the weekend have already shown, a massive government stimulus package would help alleviate market fears about a recession dragging out. Although there was no mention of size, the President-elect’s plan centers on an infrastructure program to rival the Interstate highway system of the 1950s and also calls for funds to make public buildings more energy-efficient. That includes schools, which would be modernized and equipped with new computers in classrooms.

Opinions differ as to how big the stimulus needs to be to put Wall Street back in a buying mood. The market has arguably already discounted a $500 billion package, says S&P’s Young, while Robert Reich, Labor Secretary in the Clinton Administration, said last week that spending needs to be 4% of GDP, or roughly $600 billion. Quincy Krosby, chief investment strategist at The Hartford (HIG), believes the package needs to be larger than $700 billion to be meaningful.

While investors are most concerned with policies that could jump-start the economy now, investing in longer-term projects will ultimately drive more sustainable GDP growth in the future, says Abby Joseph Cohen at Goldman Sachs. And investing in infrastructure no longer means only building tangible projects like bridges and highways, but also encompasses provisions for the "information economy, like the right sort of broadband connections and making sure portions of the population that are shut out of educational opportunities have access to [Internet-based resources]."

3. An End to Redemption-Related Selling by Hedge and Mutual Funds
Investors are likely to hang back and wait until they believe the deluge of fund-driven selling on any sign of strength in the market has petered out, says Krosby. There’s an estimate that hedge funds still have to raise something like $200 billion to meet redemptions by the end of December. And mutual fund managers are also under pressure to sell securities to meet redemptions.

"There’s almost a Pavlovian response every day at 3 p.m. [as people wonder] ‘When is the selling going to begin?’ That has to stop because you need to have investors feel comfortable that buying will beget buying, not technical selling," she says.

4. Increased Lending
Restarting the free flow of credit is another critical component in restoring investor confidence. A 187-basis-point drop since October in the three-month London Interbank Offered Rate (LIBOR), the rate banks charge each other for short-term lending of up to one year, and increased liquidity in the commercial paper market are signs that short-term credit has begun to loosen. But long-term lending remains stuck, says Skrainka at Edward Jones. The Fed’s recent announcement that it plans to buy up to $500 billion of mortgages guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and another $100 billion of the corporate debt of government agencies, pushed interest rates on 30-year mortgages down three-quarters of a percentage point to around 5.50% as of early December. The 20% spread between corporate high-yield bonds and Treasury notes still needs to come down, however, he says.

Lower mortgage rates, which will give families a chance to refinance their homes and lower their monthly payments, will help unlock other credit markets, which will reignite business investing, says PNC’s Stone. "Then private industry goes back to infrastructure spending, because frankly they couldn’t [do that] right now if they wanted to because [companies] can’t get loans," he says.

5. Tax Cuts
Krosby at The Hartford believes cutting corporate and consumer taxes would encourage spending and put a fire under the stock market. "I don’t mean temporary tax cuts because you can’t plan for how much money you have," she says. "If they are long-lasting cuts, then companies and consumers can make plans."

The goal is to spur demand on the corporate side and consumer side. Historically, tax cuts have been a significant catalyst for boosting demand, though that may not hold this time, depending on how bad businesses and consumers think the recession will get and how many jobs end up being eliminated.

A payroll holiday such as the one advocated by Democrats earlier this year could also help, she says. While campaigning for the Democratic Presidential nomination, Obama advocated a cut in the payroll tax, which finances Social Security, of up to $1,000 for middle-class households to offset the costs of not only gasoline, but also of food. Gas costs have come down considerably over the past three months, but consumer spending remains seized up amid bigger worries, such as job losses.

What to do until the pieces of a sustainable rally are in place? Until investors are convinced the catalysts are present for broader-based investing in equities, they can take some comfort in stocks whose dividends they think aren’t in danger of being cut, says Krosby. "There’s a worry that if profits continue to decline and aren’t already discounted by the share price, that dividends are going to be cut," she says. "That’s why you have investors only in companies right now that have very strong cash flow and balance sheets." In other words, investors might do well to hunker down with some high-quality names until the clouds lift.

Because of decades of deregulation in the financial sector and the increased intertwining of financial markets around the world, the current global economic turmoil will almost certainly result in fundamental changes in the way markets operate and businesses raise capital.

Standard & Poor’s Ratings Services believes any return to relative stability and renewed growth will involve greater regional and global coordination in banking and securities oversight. We expect governments to reverse a long trend of deregulation and privatization in the financial services sector, strengthening their sway with lenders to unlock credit markets and help prevent future freezes.

Investors, however, may find fewer places to park their money. Risk aversion in the wake of declining valuations in the structured finance market, specifically in the U.S., will likely continue for the foreseeable future. Any revival of this market will be accompanied by significant change—simpler structures and pricing commensurate with, or at least closer to capturing, the inherent risks.

Globalization makes it difficult for any national regulator to tighten oversight significantly because business can readily be moved to other financial markets. Therefore, more coordination among regulators will be needed. And as markets become more global, so will financial centers. Standard & Poor’s believes trading will be concentrated in three major centers: the U.S., Europe, and Asia. This will foster ’round-the-clock trading.

Bigger Governments

"The role of government in financial systems around the world will increase significantly, and conventional boundaries between the state and markets will be subject to challenge," says Standard & Poor’s Asia-Pacific Chief Economist Subir Gokarn.

The winners in this game will be international cities that welcome foreign banks and their workers. This attraction of transplanted employees and acceptance of different languages and cultures will be essential to successfully coordinating financial regulation. Toward this end, we expect New York and London to remain among the world’s financial centers; Asia’s leader should be a toss-up between Hong Kong and Singapore.

At the same time, improvements in communications technology and computer trading mean market players no longer have to be in a financial center to trade there. Because of this, regional centers will probably be less crucial for job creation than they have been. We expect markets to be more dispersed, with secondary centers becoming more important and national financial capitals remaining essential for certain types of trading or for domestic companies.

Increased cooperation among regional regulators and an end to decades of deregulation and privatization in the financial services sector may help stave off recession in areas that are still financially healthy (such as China) and may shorten the suffering in countries already in—or about to suffer—recessions. But perhaps just as important to global economic stabilization will be investors’ return to the midpoint between the insatiable appetite for risk (and the resulting high returns) that fueled the boom in structured finance and the ardent risk aversion that has contributed to the closing of credit markets and the historic tumbles on the world’s stock exchanges. Although this will take time to materialize, more prudent pricing of assets and the desire to reach for yield will inevitably take place, accompanied by the next wave of economic exuberance and the froth for the next bubble.

Like all periods of global economic and financial turmoil, this latest episode will give way to a stretch of growth and stability. But clearly, a number of things must happen before this can occur.

What Has to Happen First

In the U.S., the economy must stabilize before financial markets can recover. We think the worst of the slump lies ahead—despite the government’s stimulus package—but the economy has proved more resilient than we expected.

Standard & Poor’s expects the downturn to be mild but protracted, reaching a trough in the spring followed by a sluggish recovery. Even though some signs hint that home sales are nearing the bottom, a sharp rebound in oil prices or extended financial turmoil could prolong and deepen the slump. On top of this, consumer spending is likely to drop even further in the coming months. However, because we expect only a moderate increase in unemployment, to 8% by late 2009 from 6.5% now, spending will probably stabilize by the spring.

The bigger risk, in our view, is that the U.S. economy and financial markets will echo Japan’s experience in the 1990s. In 1999 the Bank of Japan lowered benchmark interest rates to zero, but because banks were impaired by heavy loan losses, money did not find its way to customers. A decade of stagnation in the Japanese economy followed.

"We think Federal Reserve Chairman Ben Bernanke understands the mistakes that the Bank of Japan made in the early 1990s," says Standard & Poor’s North American Chief Economist David Wyss. "However, understanding what they did wrong doesn’t mean we know what to do right. There is a risk of just making different mistakes."

A Streamlined Structure

The Federal Reserve has once again cut its key rate to 1%, and futures markets indicate that traders expect another half-point cut in December. This comes as the central bank has assumed the role of lead regulator in the U.S., even though the extent of its reach remains unclear. If other countries seek to coordinate their regulatory policies with ours, it is unclear which U.S. entity they would do that with. As a result, we expect one consequence of the current turmoil to be a streamlining of the regulatory structure, even if the U.S. does not appoint a central regulator.

The federal government’s stakes in the financial services sector also highlight the likelihood of increased oversight, as regulators see the need to have a hand in managing these investments. This is an issue not only in the U.S. but also in Europe, where governments have taken even larger stakes in lenders and where a semi-nationalized banking system is more accepted.

The European economy is also in a recession. A contraction in business investment because of tighter margins, the prospect of weaker demand, and far less favorable financing conditions has deepened and broadened the downturn across the Continent in the past four months. As banks curb lending because of liquidity concerns and the commercial paper markets remain shuttered, companies are feeling greater strains on their financing.

A recession in the U.S. will clearly dampen growth in Asia as well, mainly by hampering export growth. In the past few years, the significance of the U.S. market for Asian exports, albeit still high, has declined. But Asia can offset this, at least in part, by keeping its countries’ exports to their regional neighbors steady.

As in the U.S. and Europe, the abatement of inflationary pressure in Asia creates the opportunity for monetary stimulus. Many countries in the region have trimmed interest rates and addressed problems in the financial system by infusing large amounts of liquidity, both as a macroeconomic measure and to support specific institutions or segments of the system.

Although we expect economic growth to slow in Asia through 2009, it will likely remain relatively firm by global standards.

U.S. stocks closed higher Wednesday, led by gains in commodities-related issues as crude oil and gold futures rallied. Market observers cited by S&P MarketScope said a number of investors shifted funds out of financials and into energy and materials stocks. This rotation came as investors weighed various sectors’ near-term prospects for gains against the uncertain economic outlook.

Trading, however, was choppy for much of Wednesday’s session, with the market seesawing amid the lingering debate in Washington over the proposed $15 billion bailout of Detroit automakers Chrysler LLC, General Motors (GM), and Ford Motor Co. (F). The fate of the proposed bailout remained unclear at the end of Wednesday’s session.

Traders weighed reports that showed U.S. wholesale inventories falling 1.1% and wholesale sales down by 4.1% in October, both worse than expected by the market; and that the government posted a $164.4 billion November budget deficit.

Bonds were mixed. The dollar index was lower. Gold futures soared on a technical breakout. Oil futures were up despite inventory data showing a rise in crude stockpiles.

On Wednesday, the Dow Jones industrial average finished higher by 70.09 points, or 0.81%, at 8,761.42. The broad S&P 500 index was up 10.57 points, or 1.19%, at 899.24. The tech-heavy Nasdaq composite index added 18.14 points, or 1.17%, to 1,565.48.

On the New York Stock Exchange, 20 stocks were higher in price for every 11 that fell. The ratio on the Nasdaq was 15-12 positive.

European equities ended mixed Wednesday, with London stocks falling 0.32%, Paris up 0.68%, and Frankfurt gaining 0.54%. Asian markets finished with gains, with Tokyo stocks rising 3.15%, Hong Kong up by 5.59%, and Shanghai climbing 2.03%.

The Wall Street Journal reports that American International Group (AIG) owes Wall Street’s biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan. The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm’s near-collapse in September.

Ivory Investment Management LP, one of Yahoo Inc.’s (YHOO) largest stockholders, proposed to Yahoo’s board that the company salvage a deal with Microsoft (MSFT). Under the proposal, Microsoft would own and operate the combined search platform, with Yahoo becoming an affiliate that retains 80% of the revenue generated through searches on its own site. Finally, Microsoft would become the search engine for Yahoo’s existing search affiliates. Ivory believes a search deal with Microsoft could deliver value to Yahoo shareholders of $24-$29 per share.

In economic news Wednesday, Treasury posted a $164.4 billion deficit in November, not quite as bad as expected, though it’s still two-thirds bigger than last November’s $98.2 billion in red ink. TARP spending contributed $76.5 billion to the deficit, says Action Economics, while the Treasury purchased $23.2 billion in GSEs; there were also calendar distortions that boosted the deficit. So far for fiscal 2009, the deficit totals $401.6 billion, compared to the $155.1 billion for the same two-month period last year.

U.S. wholesale sales fell 4.1% in October and inventories were down 1.1%, both about double the declines expected. September sales were revised down to -2.1% (from -1.5% previously), while inventories were revised to -0.4% from -0.1%. The decline in sales was the largest on record, while the inventory drop was the biggest in seven years, as the data were affected by the double whammy of the recession and weaker oil and commodity prices, notes Action Economics. Petroleum sales dropped 11.2%, excluding petroleum, wholesale sales were down 2.9%; auto sales fell 4.5%. The inventory-sales ratio surged to 1.16 from 1.12.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 7.1% to 796.8 in the week ended Dec. 5. The index had more than doubled in the week before after the Fed announced a plan to purchase up to $500 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The MBA index of refinancing applications declined 0.9% to 3,767.3 last week. Its gauge of loan requests for home purchases fell 17.4% to 298.1. Fixed 30-year mortgage rates averaged 5.45% last week, down from 5.47% in the prior week, the MBA said.

The ABC News/Washington Post consumer comfort index rose 2 points to -52 in the week ended Dec. 8, from -54 a week earlier. According to the survey, just 8% of respondents expressed confidence in the economy, up from 7% the week before. Also, 43% of those polled said their own finances were in good standing, up from 42% in the prior week. In assessing the buying climate, 21% of respondents said it was good, up from 20% a week earlier. The consumer comfort index was based on a random survey of 1,000 respondents nationwide in the four weeks through Dec. 8.

Traders were awaiting a report later Wednesday on the Treasury budget, which was expected to showing a $200 billion deficit for November.

Neel Kashkari, Treasury assistant secretary in charge of the Troubled Asset Relief Program, said the Treasury is working with regulators to determine the best way to monitor the effectiveness of the government’s $700 billion capital injections into banks. “We may utilize a variety of supervisory information for insured depositories, Kashkari said in testimony before the House Financial Services Committee. Transparency gives taxpayers “comfort in our stewardship of these funds” and markets “confidence that we are stabilizing and strengthening the financial system.” The department is actively engaged in talks with regulators to measure the success of TARP capital purchases using data from the Home Mortgage D