As Wall Street rallied this week, it seemed that investors were taking comfort in the notion that the economy had become so imperiled by the crumbling housing market that it was forcing the government to finally mount an aggressive rescue effort.
Investors found reassurance yesterday in talk that the White House was brokering a deal with banks that could diminish a looming tidal wave of home foreclosures. Soothing words from the Federal Reserve earlier this week revived the hope that more interest rate cuts are on the way, drowning nervousness in a din of buying.
“The market now feels comfortable that the Fed has come to appreciate the severity of the situation,” said Robert Barbera, chief economist at the brokerage and advisory firm ITG. “The bad news gives you the blessing of lower interest rates.”
But even as investors took heart in palpable signs that the government was preparing to dole out more medicine for the ailing economy, a number of economists cautioned that the pain itself was still unfolding, with its ultimate magnitude far from known.
Signs point to a slowdown in the creation of jobs and investments by companies. Consumers are clutching their wallets more tightly. Banks are denying loans to many businesses, unwilling to bet scarce capital in a time of risk and uncertainty. A glut of unsold homes keeps prices falling and the construction industry in distress.
And even the sharp fall in the price of oil, which offered the comfort that higher energy costs might be easing, reflects a broader fear that global economic activity may slow as growth falters in the United States.
Looming large over the landscape is uncertainty about the size of losses still confronting banks and other financial institutions as they reckon with bad mortgages along with credit card debts, auto loans and the complex detritus of an era of loose money now over.
“It’s a sucker’s rally,” said Nouriel Roubini, a former Treasury official who runs an economic consultancy, RGE Monitor. “The market is essentially hoping the Fed can rescue the economy. But they are discounting the onslaught of really lousy economic news.”
The price of oil, which only last week threatened to break through $100 a barrel, closed yesterday at $88.71, completing its steepest weekly plunge in the last two years. Cheaper oil blunts the threat of inflation, adding to the sense that the Fed has room to take interest rates lower without worrying about setting off an upward price spiral.
But the lower price also reflects the view of investors who now expect a substantial American economic slowdown, which would ease the pressure of the rising demand for energy.
“The market is realizing how much of a train wreck the economy is right now," said John Kilduff, an energy analyst at MF Global in New York.
There are plenty of reasons, of course, to count on the economy’s inherent countervailing forces to ultimately help restore it to health. Lower interest rates should indeed spur more economic activity. A falling dollar has helped spur American exports and curb imports, contributing to a narrower trade deficit. And if the banks really do sign on to the deal the Bush administration is pushing to keep lower rates in place for subprime mortgages, that should keep a lot of people from losing their homes.
Yet many of the forces gnawing at the economy remain in place, and actually appear to be intensifying. The trajectory was reinforced by data released yesterday, which showed that Americans now have less money in their pockets and are less inclined to spend.
Personal income grew at a seasonally adjusted rate of 0.2 percent in October compared with September, the Commerce Department reported. That was only half the rate expected. Consumption grew a paltry 0.2 percent, dropping from the 0.3 percent increase registered in September. Construction spending plummeted at double the anticipated pace.
Perhaps more ominously, a government report released yesterday suggested that the number of jobs created in the spring was far smaller than previously assumed.
The economy generally needs about 125,000 new nonfarm jobs each month to absorb newcomers entering the labor force and employ those who have lost work, said Mark Zandi, chief economist at Moody’s Economy.com. In 2006, the economy was still creating about 200,000 positions a month, according to the Bureau of Labor Statistics. But in the first 10 months of this year, the number slipped to 125,000.
On Friday, the government is to disclose how many nonfarm jobs were created in November. Mr. Zandi and many economists expect the number to fall to about 75,000. “That will erode confidence in the economy,” he said. “It becomes self-reinforcing, and the economy will slide into recession.”
If the economy does land in recession, “that would mean we’re going to lose a million jobs over a two-year period,” predicted Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore. Whether the economy can avoid that fate, Mr. Levenson suggested, may ride on whether the words of comfort the market heard this week turn out to be sincere.
The Fed has to drop rates enough to break the financial logjam and encourage businesses and households to borrow and spend anew. The White House has to deliver a deal that really will prevent millions of families from losing their homes, he said.
“If the president puts his seal on it, that would tell me the grown-ups are in charge,” Mr. Levenson said.
Floyd Norris and Jad Mouawad contributed reporting.