The US December employment report today – together with elevated figures for initial and continued claims for unemployment benefits in the last few weeks – confirms that the last factor that was supporting the economy and a shopped-out consumer – income and labor generation – is now faltering making a recession effectively unavoidable.

Until now soft landing optimists could dismiss other recessionary signals in the economy – a much worsening housing recession, faltering capex spending by the corporate sector, a severe liquidity and credit crunch, oil at $100, forward looking indicators of supply (ISM) showing contraction, a weakened consumer that was saving-less and debt burdened – based on the argument that as long as there was job generation the consumer would keep on spending and – with consumption being 72% of aggregate demand – a recession could be thus avoided.

Until now the US consumer had negative savings, was debt burdened and was being buffeted by many shocks: falling home values, falling home equity withdrawal, rising debt servicing given resetting ARMs, rising delinquencies on mortgages, credit cards and auto loans, falling consumer confidence, high and rising gasoline prices and, more recently, falling stock market wealth. But as long as income and jobs were generated at a satisfactory rate the optimists argued that all these shocks did not matter as the consumer would keep on consuming. But the dismal employment report today – 18K jobs created, private jobs falling by 13K and unemployment rate up to 5% from 4.7% - confirms that even job and income generation is now faltering making a recession an almost sure outcome.

As argued here before, at this point the debate is not about soft land or hard landing; rather it is about how hard the hard landing will be. Many sophisticated analysts that were in the soft landing camp are now talking about a “mild” recession in 2008, i.e. a two quarters recession in H1 followed by a recovery of growth in H2 of 2008. This author’s assessment is rather one of a more severe and painful recession – lasting at least four quarters – into most of 2008.

Worse, a vicious circle of a worsening financial market making the liquidity and credit crunch worse and thus hurting more the real economy together with a contracting real economy increasing and spreading the financial losses and defaults from sub-prime to near prime and prime mortgages, to commercial real estate loans, to auto loans, credit cards and student loans, to leveraged loans and failed LBOs, and to sharply rising default rates on corporate bonds (with overall financial losses adding up to more than a trillion dollars) will make the economic contraction and the financial fallout persistent, severe and painful. At this point a severe systemic financial crisis cannot be ruled out. This will be a much worse recession than the mild ones in 1990-91 and 2001.

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