Recession question to mark 2008

NEW YORK – Wall Street is set to end 2007 with modest gains this week and kick off the new year with all eyes trained on jobs data for signs of recession that could make 2008 a hostile environment for stocks.

Volume will probably be thin on Monday, when New Year’s Eve coincides with the final trading day of 2007. The market will be shut for New Year’s Day on Tuesday. But Wednesday, Thursday and Friday will be closely watched because the first five trading days tend to mirror the market’s performance over the course of the year.

“There will be cash flows that come in right at the beginning of the year that portfolio managers try to get deployed early,” said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co, in Lake Oswego, Oregon. “That may give us a lift, unless they decide to take their time and survey the overall economic landscape.”

The financial and consumer discretionary sectors were the two major victims of the subprime mortgage meltdown in 2007. Of the 10 S&P major industry groups, they were the only ones to end the year in negative territory.

Whether the housing market’s meltdown and the resulting credit crisis claim any further victims depends on the job market. The U.S. economy maintained low levels of unemployment in 2007, which helped keep consumer spending flowing.

“A lot of people believe we started a recession in December,” said Hugh Johnson, chief investment officer of Johnson Illington Advisors. “We’ll get a good idea whether that’s true or false from the jobs data.”

The nonfarm payrolls report, the most closely watched U.S. employment indicator, is set for release on Friday. Economists expect the data to show the economy added 70,000 new jobs in December, compared with 94,000 in November.

The ADP National Employment report, a measure of private-sector employment, is set for release on Thursday. The indicator, which is seen as a preview to the government’s payrolls report, is forecast to show a gain of 50,000 jobs in December.

Signs of trouble in the job market emerged on Thursday when weekly initial jobless claims rose unexpectedly and the number of longer-term unemployed workers rose to its highest level in more than two years. Another round of weekly jobless claims data is set for release on Thursday.

Investors will scrutinize economic data not only for warning signs of recession, but also to gauge how many more times and by how much the Federal Reserve will cut interest rates.

On Wednesday, the Fed will release the minutes from its December 11 monetary policy meeting, when it cut rates by a quarter-percentage point to help the economy withstand tightening credit conditions and the extended housing slump.