It's official: Manufacturing is in recession

I think most people will agree that another of the pillars of the US economy is in recession. Add it to the list that already includes housing, financial markets, and consumer spending.

March 3 (Bloomberg) -- Manufacturing in the U.S. shrank at the fastest pace in almost five years and construction spending fell the most since 1994 as the economy moved closer to a recession.

The Institute for Supply Management's factory index dropped to 48.3 in February from 50.7 the previous month, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion. At the same time, the Commerce Department reported that spending on building projects slumped 1.7 percent in January, more than anticipated.

The collapse in housing is rippling through the economy as consumers pare spending and factories cut production of cars, furniture and appliances. Traders are betting the Federal Reserve will be forced to reduce its benchmark interest rate by 0.75 percentage point at its March 18 meeting.

Friday's unemployment report will be the final piece of the puzzle if it's over 5%. However, one factor helping unemployment stay low is that jobs have not seen real wage increases in ten years. Companies are already running leanly regarding employment, and won't see a big cost savings by cutting jobs. Of course, having such low wages does mean that the economic burden falls on the average US worker instead of the company. Rising inflation, lowered wealth effect from the housing market collapse, and no real wage increases means tough times this year.