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The markets are resigned to the fact that the economy will continue to show weakness in the near term and are unlikely to react very negatively unless the pace of decline deteriorates further. A weak first-half performance may result in a permanent market bottom from where the markets should rally in the second half of the year. Consumer spending may continue to be restrained due to a rise in unemployment, as more and more companies slash jobs.

IHS Global Insight forecasts a 5.6% decline in real GDP in the fourth quarter of 2008 followed by a 5.4% drop in the first quarter of 2009. In the second half, the economy is likely to see anemic positive growth. Therefore, the recession could extend anywhere between 18 and 24 months, making it the longest in the post-war period.

The good news on the inflation front could soon turn bad, as the falling oil prices are likely to engender deflationary threat. Economists expect core consumer price inflation to fall below the Federal Reserve`s comfort zone of 1%-2% by mid-2009. 

The housing market crisis seems to be deepening and isn`t showing any signs of a bottom. A report released this week showed that the S&P Case-Shiller 20-city Composite Index fell a record 18% year-over-year in October. Prices retreated in all 20 cities covered by the survey. On top of that, inflation-adjusted prices showed a steeper decline. According to IHS Global Insight, house price declines will continue as long as foreclosures rise.

Meanwhile, the Conference Board said Tuesday that its consumer confidence index fell to 38 in December from a revised 44.7 in November. Economists had been expecting the index to edge up to 45 from the 44.9 originally reported for the previous month. Thus job losses seem to preoccupy minds of consumers, nullifying the positive impact of receding gas prices. Lynn Franco, Director of the Conference Board Consumer Research Center said, `The overall economic outlook remains quite dismal for the first half of 2009, and only a modest recovery is expected in the second half.`

The NAPM - Chicago said its regional index of activity in the manufacturing sector edged up to 34.1 in December from 33.8 in November, with a reading below 50 indicating a contraction in the sector. Economists had expected the index to slip to a reading of 33.0.

The manufacturing sector continued to contract in December, according to a report released by the Institute of Supply Management. The purchasing managers` index fell 4 points to 32.4 in December, worse than the consensus estimate of 35.4. The new orders index slipped 5 points to 22.7, representing a record low value. The data underscores the view that the U.S. economy will see a severe decline in GDP growth in the fourth quarter of 2008 and the first quarter of 2009.

The upcoming week`s economic reports are likely to be parsed by traders, as they assess the severity of the damage the economy is experiencing. The markets may watch with particular interest the Institute for Supply`s non-manufacturing index for December, the minutes of the December FOMC meeting and the monthly non-farm payrolls report for December.

Additionally, traders could also focus on the November construction spending report, the Commerce Department`s factory goods report, the National Association of Realtors pending home sales index for November, the Federal Reserve`s consumer credit report for November and the wholesale inventories report for November. The regularly scheduled weekly jobless claims and oil inventory reports may also draw some attention.

Labor market conditions aren`t getting better and the fact is likely to be underscored by Friday`s non-farms payroll report. Weekly jobless claims are now consistently above the 500,000 mark and continuing claims are trending above the 4 million mark. Since January 2008, the U.S. economy has lost about 1.9 million jobs and the jobless rate has climbed 1.7 percentage points. CIBC World Markets is of the view that the fourth quarter will likely end up being the worst of this down-cycle.

The FOMC minutes are likely to be analyzed threadbare for guidance on the potential approaches the central bank will take to quantitative easing. The Fed may most likely maintain its fed funds futures rate around the current near zero levels until the end of the year 2009.

Meanwhile, the ISM`s services index is likely to remain little changed in December. That said, the business activity index is expected show a small upward bounce. The reduction in production has reduced freight activity, while mortgage applications have increased in recent weeks.

Monday

Individual car and light duty truck manufacturers are scheduled to release their sales on Monday. These sales are a good indicator of the trend in consumer spending.

The Commerce Department`s construction spending report to be released at 10 AM ET on Monday is expected to show a 1.2% decline in spending for November.

Construction spending declined a worse-than-expected 1.2% in October, although spending levels for August and September were revised up. While private construction spending fell 2%, public construction rose 0.7%. Among private construction, single-family home construction declined 4.6% and non-residential construction edged down 0.7%.

Tuesday

The Commerce Department is due to release its report on factory goods orders for November at 10 AM ET on Tuesday. Orders for manufactured goods are likely to have decreased 2.6% in the month.

In October, factory goods orders declined 5.1% following a 2.5% decline in September. Durable goods orders were revised down to represent a decline of 6.9% from the earlier reported 6.2% drop. Core capital goods orders were also revised down to show a drop of 5%.

Meanwhile, durables goods orders report for November released last week showed that orders for goods designed to last for more than 3 years declined a smaller-than-expected 1% to $186.9 billion. Durable goods orders account for the bulk of factory goods orders.

Excluding transportation, new orders increased 1.2% in November. Shipments of durable goods fell 2.6%, and unfilled orders declined 0.6%. However, inventories edged up 0.5%. The key non-defense capital goods orders, excluding aircraft, rose 4.7% in November after a 6.6% slump in the previous month.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on Tuesday. The non-manufacturing index is likely to show a reading of 37 for December.

Activity in the sector contracted notably in November, with the non-manufacturing index dropping 7 points to a record low reading of 37.3 in November. The employment index declined a steeper 10 points to 31.3, suggesting a rapid deterioration in the labor market. The business activity index and the new orders index tumbled 11.2 and 8.6 points to 33 and 35.4, respectively, while the prices paid index fell 16.8 points to 36.6. New export orders showed sluggishness, with the corresponding index tumbling 15.5 points to 34.5.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET on Tuesday. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale.

Pending home sales index declined by 0.7% in October compared to the previous month. However, the decline was not as steep as the 3% drop forecast by economists. The stabilization may be reflecting distressed sales of foreclosed homes. Annually, the index was down 1%. The indexes for the Midwest and the West fell 4.3% and 8.7%, respectively compared to the previous month, while the index for the South jumped 7.8% and that for the Northeast rose 0.6%.

The Federal Reserve is scheduled to release the minutes of its December 16th meeting at 2 PM ET on Tuesday.

While announcing an interest rate cut in the range of 0%-0.25% at its December meeting, the FOMC noted that the outlook for economic activity has weakened further, with a deterioration in labor market conditions, a decline in consumer spending, business investment and industrial production and tighter credit market conditions. The Committee acknowledged the diminishing of inflationary pressures and also expressed its view that inflation will moderate further in coming quarters in light of the slowing economic growth.

The Fed also gave assurance that it will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. Additionally, the central bank indicated that it would support the functioning of the financial markets through open market operations. The Fed also said it is contemplating the purchase of longer-term securities. Early next year, the Fed will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses, the statement said.
Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET on Wednesday. The report is usually released two days prior to the Labor Department`s employment report.

The Energy Information Administration is also due to release its weekly oil inventory report at 10:30 AM ET on Wednesday.

The weekly oil inventory data for the week ended December 26th showed a 0.5 million barrel-increase in crude oil inventories to 318.7 million barrels. Crude oil stockpiles were near the upper limit of the average range for this time of the year.

Gasoline inventories increased by 0.8 million barrels but were in the lower half of the average range. Meanwhile, distillate inventories rose by 0.7 million barrels and were in the middle of the average range for this time of year. Refinery capacity utilization averaged 84.7% over the four weeks ended December 26th compared to 85.1% in the previous week.

Thursday

The Labor Department report on the number of individuals claiming unemployment benefits during the week ended January 3rd is scheduled to be released at 8:30 AM ET on Thursday.

First-time claims for unemployment benefits fell by much more than economists had been anticipating in the week ended December 27th. The Labor Department said jobless claims fell to 492,000 from the previous week`s unrevised figure of 586,000. Economists had been expecting a more modest pullback from the twenty-six year high set in the previous week to about 550,000.

The Labor Department also said that the less volatile four-week moving average fell to 552,250 from the previous week`s unrevised average of 558,000.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Thursday. Consumer credit for November is likely to show an increase of $0.5 billion.

In October, consumer credit fell by $3.6 billion or 1.6% to $2.58 trillion, with revolving and non-revolving credit declining by $0.2 billion and $3.4 billion, respectively.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM on Friday. The report sheds light on the number of paid employees working part time or full time in the nation`s business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 475,000 jobs in December and look for an unemployment rate of 7%.

Non-farm payroll employment fell by 533,000 in November, steeper than the 325,000-job loss expected by economists. The weakness that has been plaguing the economy has hit the job market hard, which is likely to increase the length and the depth of the recession foreseen, given the link jobs have with income and spending. The previous month`s job loss was revised down to show a loss of 320,000 jobs.

The unemployment rate based on the household survey rose 0.2 percentage points to 6.7%, lower than the 6.8% rate expected by economists. Meanwhile, the average hourly earnings rose $0.07 or 0.38% to $18.30.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET on Friday. Economists expect wholesale inventories at the end of November to show 0.9% decline.

Wholesale sales declined 4.1% month-over-month in October, although they were up 2.7% from the year-ago levels. Meanwhile, wholesale inventories at the end of October declined 1.1% compared to September, with the decline significantly weaker than the 0.2% drop expected by economists. Annually, inventories were up 8%. The October wholesale inventories to wholesale sales ratio was 1.16 compared to 1.10 in October 2007.