The week's economic reports

A shocking plunge in the ISM nonmanufacturing survey, the worst decline on record and the lowest reading in more than six years, highlighted the week's economic reports.

Stocks and bonds ended with the S&P 500 Index down 4.6 percent to 1,331, now down 9.3 percent for the year, and the yield of the 10-year U.S. Treasury note rose 5 basis points to 3.65 percent.
ISM Nonmanufacturing Survey: One of the steadier economic reports in recent years flashed a red warning light last week (or maybe it was more of a distress signal) when the Institute for Supply Management's nonmanufacturing survey plunged from 54.4 in December to 41.9 in January.

Up until the January report, this indicator had consistently proven to be resilient to the developing economic slowdown in the U.S., never even getting close to the 50 mark that delineates expansion from contraction. A year ago, even when the ISM manufacturing index dipped below 50 twice, the nonmanufacturing number only fell as low as 53.0.
The 12.5 point move down was the sharpest decline on record and the lowest reading since October 2001, immediately after the terrorist attacks in September.

New orders, the most important component in the survey, plunged from 53.9 in December to 43.5 in January and backlogs fell from 49.0 to 46.0. Export orders remained the only bright spot, rising from 50.0 to 52.0.

Probably the greatest cause for concern in this report was the dramatic fall in employment, from 51.7 to just 43.9. This is consistent with other labor market indicators, such as last week's first monthly decline in nonfarm payrolls since 2003, but the magnitude of the decline in this report took most analysts by surprise since employment in the service sector had previously been holding up well.

As has been the case for years now, prices remain elevated, falling only modestly from 71.5 in December to 70.7 in January, almost 20 points higher than any other category and almost 30 points above the aggregate survey number.

This report made a significant contribution to the growing body of evidence indicating that a recession has probably already begun in the first quarter of the year.

Pending Home Sales: In yet another indication of how weak the housing market has become, the National Association of Realtors reported that its pending home sales index fell 1.5 percent in December to 85.9. The year-over-year decline now stands at minus 24.2 percent and, given the increasing amount of negative news coverage on the nation's housing market, there is little reason to think that existing home sales will improve anytime soon.

Jobless Claims: Weekly claims for unemployment insurance fell from 378,000 to 356,000, however, this is still a relatively high total providing further confirmation of labor market troubles seen in other recent reports. Continuing claims are also elevated, up again in the latest data and at their highest level in more than two years.

Summary: In what was supposed to be a relatively quiet week of economic data, the ISM nonmanufacturing survey seemingly came from out of nowhere to shock the entire financial world on Tuesday. Nearly every financial market was affected as the Dow Jones Industrial Average plummeted more than 150 points when markets opened and then proceeded to lose another 100 points throughout the day.

Discussion has quickly shifted from the question of "whether there will be a recession" to "how severe the recession will be".

The Week Ahead: The coming week will be highlighted by the retail sales report on Wednesday. Also scheduled for release are reports on international trade on Thursday, and five reports on Friday - import/export prices, consumer sentiment, industrial production, treasury international capital flows, and the New York area manufacturing survey.