The Economy: Not So Super

Irene Tsikitas The National Journal

The excitement surrounding yesterday’s unprecedented Super Tuesday nominating contests obscured the latest and perhaps most damning news to come out on the troubled economy: Activity in the crucial service sector slowed for the first time in nearly five years last month.

The report from the Institute of Supply Management shows a significant decline in non-manufacturing activity (previously the "firmest pillar of economic expansion") in January. Those numbers, coupled with last week’s news that jobs were declining, are heightening concerns that the economy is not only headed for a recession, but is already in one.

"Recession is here," the headline on CNNMoney.com read yesterday. The report quotes several economists who said the ISM report was the tipping point for them.

"The service sector is a much larger component of the economy [than manufacturing] and this is very much a recession reading," said Keith Hembre of First American Funds. "The big drop in business activity, that’s a huge red flag," agreed Gus Faucher of Moody’s Economy.com, which is now officially considering the economy in a recession, although not necessarily a long-lasting one.

Reports from the Wall Street Journal, Agence France-Presse, Thomson Financial and the Boston Herald quote other economists sounding similar notes of pessimism after the ISM report.

The report sent stocks plunging yesterday — its largest one-day drop in almost a year — although they’ve rebounded somewhat this morning on a Labor Department report showing worker productivity increased more than expected in the fourth quarter. The Wall Street Journal (subscription) has more on that report.

The Journal writes that the disappointing service-sector report "reinforced expectations that the Federal Reserve will cut its target for the benchmark federal-funds rate, at which banks lend to each other overnight, to 2.5% at its March 18 policy meeting from the current 3%."

The mounting consensus among economists that a recession has already begun could also increase pressure on senators scrambling to reach a consensus on the economic stimulus package quickly agreed upon by President Bush and House leaders. The Senate is attempting to expand the scope of tax rebates and incentives included in the package, and Majority Leader Harry Reid has said he will not back down from those efforts.

In testimony before the Senate Finance Committee yesterday, Treasury Secretary Henry Paulson hinted that the White House could agree to expand rebates to retirees and disabled veterans, although the administration continues to raise objections to some other proposals in the panel’s version of the bill, which is slated for a vote later today.

Reuters reports that the three sitting senators running for president are planning to return to Washington today for that vote — and with good reason. The economy is now far and away the No. 1 issue (subscription) Americans say they want the presidential candidates to address.

The issue appears to be working in Hillary Rodham Clinton’s favor on the Democratic side, with voters most concerned about the economy leaning toward the New York senator in nearly two-thirds of the Super Tuesday states for which there are exit polls, according to National Journal’s Ronald Brownstein.

Somewhat surprisingly, Sen. John McCain also picked up a plurality of GOP voters citing the economy as a top concern, even though businessman and former Massachusetts Gov. Mitt Romney has fought hard to lay claim to the issue.

AP has more exit poll stats on the economy and other factors affecting yesterday’s results.