Since last July I have been predicting that the US will enter into a recession in 2007. By now it is clear that several sectors of the economy are already in a recession, that Q4 growth will be lower than Q3 growth and that a formal recession (two or more consecutive quarters of negative growth) will very likely start by Q1 or at the latest Q2 of 2007.

It is is certainly the case that we are already in a severe housing recession; and this housing recession is nowhere near bottoming out: building permits - the most important leading indicator of future housing - fell another 5% last month and are already down 30%, and likely to fall even more in the coming months. In the housing sector the cycle starts with permits that lead to housing starts, to construction spending, employment in housing and sales. The continued fall in permits is the strongest signal that a 15% fall in housing starts (from trailing peak) is only the beginning of a much sharper adjustment in the housing sector. The sharp fall in new home prices - down 10% already - is the beginning of a much bigger downward adjustment in prices ahead.

The housing recession is now spreading to other sectors of the economy. Until Q2 non residential construction investment was strong but it was only half the size of housing; but by now it is clear that non residential construction is also completely stalling; the figures for total construction spending for September show a sharp fall in residential construction and a stall of non residential construction. The reason for this contagion from residential to non  residential construction is obvious: since we have now entire "ghost towns" in the West (a term used by SF Fed Prez Janet Yellen to describe many housing developments that are empty in the West) no one is going to build stores, shopping malls, shopping centers/strips, offices near these "ghost towns". Indeed, as reported in the lead article of the WSJ last week, a McGraw Hill Construction study forecasted sharp drops in non-residential construction in 2007 as lower housing leads to lower non residential construction. Indeed, the October figures for construction employment already show a fall of 26K (after a plus of 5K in September), a fall that will accelerate in the next few months as housing construction now under completion is completed and then new starts will become sharply lower.

And now in addition to a housing recession and the coming non-residential construction recession, we are also into an auto sector recession that is getting worse by the month as major auto makers as slashing production in face of sluggish sales and massive excess capacity. But this is not just a auto sector recession. We are also already in a manufacturing recession and non-manufacturing industrial recession too: two months of consecutive fall in industrial production, a manufacturing ISM that was borderline awful (just above the 50 recession mark), continued and persistent fall in manufacturing employment (-39K in October alone). Things are getting particularly bad in consumer durables sectors (autos, home appliance, furniture, etc.) as these are closer to housing; but more broadly almost all industrial sectors are contracting. So, housing and construction and manufacturing and industrial sector are already in a recession.

We are not yet in a service sector recession but we are getting close to it. Wal-Mart's sales number were not only awful for October; they expect their sales to be flat in November, the worst performance in a decade. The troubles of Wal-Mart - in spite of much lower oil prices - are also the troubles of most other retailers as the figures yesterday for most major retailers' same store sales were mediocre and disappointing. Thus, the expected pick-up in sales for the holiday season is now fizzling away. The sorry state of the retail sector is also signaled by falling employment levels in this sector in October. And even today's services ISM report was much worse than the headline figure was showing. The headline was up but the details of it were worrisome: the indeces for new orders, employment, and the order backlog all fell sharply while the price index shows lessened pricing power by service sector firms, consistent with the weakening of the overall service sector.

Today's employment report was consistent with my analysis that a good part of the economy is already in a recession: mediocre headline figure at 92K jobs with sharp fall in construction and manufacturing employment, flat levels of the leading temporary employment and falling retail sector employment.  Only the service sector is still growing jobs (mostly governement, health care and burger-flipping food sector jobs). And note that both employment and the unemployment rate are lagging indicators of the business cycles. So, it is pretty bad if the best we can do is to add 92K jobs even before an economy-wide recession has started.

In conclusion, the argument that the housing recession is not spilling over to other sectors and to the consumer is faltering: we already have a housing recession, a coming non-residential construction recession, an auto recession, a manufacturing recession, a durable goods recession, an industrial sector recession, and now signs of faltering of the service sector starting with the retail sector and the fall in consumer confidence.  Q4 growth is headed to be even worse than the dismal Q3 and the economy is highly likely to enter into an outright recession by Q1 or at the latest Q2 of 2007.