Light, or train, at end of tunnel?

By Burton Frierson

NEW YORK (Reuters) - For weeks the U.S. economy appeared to be approaching the light at the end of a tunnel, but now it seems the light may be an oncoming train.

Falling oil prices and surprisingly robust second quarter economic growth had convinced some analysts that the United States might skirt recession, with the help of timely tax refunds and the U.S. dollar's export-boosting weakness.

However, a grim U.S. jobs report on Friday expanded the previous body of evidence suggesting the world's largest economy had already succumbed to the effects of the worst housing slump since the Great Depression of the 1930s.

"This is a very weak jobs report that screams recession," said John Ryding, chief economist at RDQ Economics in New York.

"It was shockingly weak."

The government's payrolls report showed the U.S. economy shed jobs for the eighth consecutive month in August and the unemployment rate shot up to a five-year high of 6.1 percent.

Economists will now take off their rose-tinted glasses as they anticipate this week's data on the hard-pressed U.S. consumer, a recovering U.S. dollar, and the continuing saga of the U.S. credit crunch.

The big numbers due out in the United States are August retail sales and September consumer sentiment, both of which come out on Friday.

The figures will give an updated view of the beleaguered U.S. consumer, who has confronted job losses and soaring energy costs this year, and these reports could stand in sharp contrast to last month's report on strong growth in gross domestic product.

Falling oil prices CLc1 which are currently near 5-month lows, may bolster consumer sentiment somewhat, but the underlying theme will be one of weakness, analysts say.

"By any metric other than GDP, the U.S. economy is in recession, and the labor market report reinforces this," said Edward McKelvey, senior economist at Goldman Sachs in New York.

"In terms of next week's data, its main implication will be to reinforce expectations of a weak retail sales report, as growth in wage and salary income remains subdued. Fed officials will see the report as one more reason why rate increases are not at all appropriate at this time," he said.

Some corners of the bond market already indicate investors are preparing for the possibility of interest rate cuts from the Federal Reserve after suggesting for months that the U.S. central bank's next move would be an increase.

BAD TO WORSE

The shrinking job market is bad enough. To make matters worse, the slowing global economy will damp foreign demand for U.S. products.

The result could be a vicious cycle of weakness passed from one major economy to another. Tuesday's export figures from Germany, and Friday's euro zone industrial production may further clarify this process.

The euro zone economy suffered a contraction in the second quarter while Japan is thought to be on the brink of a recession or already in one.

Data from Japan, the world's second-largest economy, includes the latest revision of second-quarter GDP on Friday as well as July international trade on Wednesday.

The prospect of other major economies slowing has also weakened the euro and other currencies against the dollar. If this continues, it could further erode U.S. exports, which have been one of the few bright spots for the economy.

Against major currencies .DXY the U.S. dollar is near its highest in about a year, though it retreated slightly after the U.S. jobs report on Friday.

ADDING CLOUDS TO THE GLOOM

Adding to the gloom is the cloud that has been hanging over the U.S. financial sector since a credit crisis erupted last year in the wake of the mortgage debacle in the United States.

Merrill Lynch & Co Inc MER.N, the world's largest brokerage, which was battered by over $40 billion in write-downs, will incur fresh write-downs, according to a Goldman Sachs research report. Goldman analyst William Tanona downgraded the stock to a "sell".

Lehman Brothers Holdings Inc LEH.N, the fourth-biggest U.S. investment bank, also remains under pressure to raise capital. It has racked up large losses and still bears more than $60 billion of mortgage and commercial real estate exposure.

State-controlled Korea Development Bank (KDB) is in talks to acquire or invest in Lehman, but any deal was thrown into doubt amid recent financial market volatility in South Korea.

But this week's data is likely to show that cash-strapped U.S. consumers are focused on issues closer to home, such as jobs and energy prices.

Indeed, whether or not officials ultimately decide to call the recent U.S. downturn a recession, a determination which is traditionally done by the National Bureau of Economic Research, their pronouncement may carry little weight for workers facing job cuts and high gasoline prices.

"From most people's point of view it's just if the unemployment rate goes up this much you're in a recession," said Bob Mellman, senior economist and managing director at JP Morgan in New York.

(Reporting by Burton Frierson)