The National Bureau of Economic Research (NBER) officially declared the U.S. entered into a recession in December 2007 — making it the longest recession since 1981. Still, current economic data points to a deepening recession as job losses in November reached 533,000 — the largest one-month decline in 34 years. Job losses are nearing two million for 2008. Both measures of manufacturing and non-manufacturing activity fell further into contraction in November.

Given the large economic risks looming, government actions remain crucial to boosting the U.S. economy. The Federal Reserve spoke to its planned efforts this past week making it clear that further easing could be expected and that stabilizing the housing market is crucial to ending the current recession. A 50 to 75 basis point rate cut in the Fed Funds rate in December is expected by the market, which is likely to be accentuated by other continued forms of quantitative easing. Furthermore, the central bank began purchasing debt from the GSE’s (Government Sponsored Enterprises) in a bid to drive down mortgage rates and stabilize housing prices.

Negative sentiment and immense economic uncertainty propelled U.S. Treasuries to new heights and yields to remarkable lows in what has been an amazing five-week rally. The 10-year and 30-year yields are at 2.7% and 3.13% respectively, with the 10-year nearly reaching 2.5% during the week.

Market volatility remains unrelentingly high as a variety of pressures, including deleveraging and the need for liquidity, continue to plague the marketplace. Many of the largest stock market moves in the last 20 years have all occurred in just the third quarter of this year (see chart for S&P 500 Index moves).

While distress in the housing market has received most of the attention, the outlook for commercial real estate has dimmed rather abruptly in just the past few weeks. The broad REIT market, often viewed as a leading indicator, sold off as much as much as 65% since mid-September, pricing in a rather steep decline in valuations.

Other major events/economic data shaping this week:

• The third quarter contraction in U.S. GDP was revised downward to -0.5% from the previous -0.3%.  
• Existing and new home sales slumped further in October, keeping inventory levels high — over 10 and 11 months' supply respectively. Home foreclosures soared compared to one year ago and are at a record 1.35 million homes.  
• Headline CPI fell 1% for the month of October, the largest one-month decline, and raising concerns that the economy may be entering a deflationary cycle. 
• While more is needed, improvement in short-term lending rates appears to have stabilized, as LIBOR, which measures the cost of unsecured borrowing by banks, has remained steady just over 2.1%. 
• Crude Oil prices continued their dramatic slide, falling more than 17% for the week and closing at $40.81 a barrel. The fall in prices prompted a sell-off of energy stocks, causing the sector to be down nearly 27% in the Russell 3000 Index over the last month.
• Spreads on high-yield securities continue to soar, nearly 20% over Treasuries, largely as a result of the Treasury rally. Average yields are now implying a default rate of 21% — higher than what was experienced in the Great Depression of 1933.
• The Institute for Supply Management (ISM) Manufacturing Index fell deeper into contraction and hit its lowest reading since 1982. The ISM Non-manufacturing Index plunged to 37.3, its lowest reading since records began in 1997. These ISM Indexes are overall indicators of the market and are closely tied to GDP. 
• Big Three automakers pleading for relief before Congress this past week took the media spotlight. GM, Ford and Chrysler are together asking Congress to make available $34 billion for relief. Auto sales continued to weaken in November to their lowest since the early 1980s.
  

Largest one-day moves in the S&P 500 Index

(Days from 2008 are highlighted)