Economic reports could darken picture on Wall St.

An investor might shrug off one gloomy reading on the job market, service sector or manufacturing as an anomaly, but two starts to smell like a trend. With fears of recession at their highest levels yet, Wall Street hopes this week’s economic reports don’t turn the remaining optimists into doomsayers.

Today, the Institute for Supply Management reports on U.S. manufacturing in February. Most analysts are expecting contraction, after a modest uptick in January and contraction in December. They also expect to see another decline Wednesday in the institute’s gauge of February service sector activity, following a steep plunge in January.

December’s manufacturing contraction had been the first since January 2007, and the service sector’s recent contraction was its first in nearly five years.

Perhaps most significant for Wall Street, though, will be the February jobs report due Friday. On average, economists are forecasting a slight increase in payrolls, but many believe that they will decline for a second straight month. Last month, the Labor Department said that there was a net job loss in January -- the first in almost four years.

January’s employment data could be revised upward if the government finds out after further research that jobs actually rose that month, a scenario that occurred with August’s results. But the market is not betting on it.

“We may have another loss of jobs,” said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc. in St. Louis. “And that would certainly confirm, in my opinion, that recession is upon us.”

A recession is usually defined by two straight quarters of declines in gross domestic output, the broadest gauge of economic health. A survey released last week by the National Assn. for Business Economics showed that 45% of economists predicted a recession in 2008.

“The consumers had a tough row to hoe,” said Goldman, pointing to rising energy costs, declining home prices and swelling debt. “If they’re secure in their jobs, they continue to spend, but with the softening job market, spending will continue to contract.”

Usually, delinquency and default rates in consumer loans correlate with the unemployment rate, but this time around, credit problems ballooned ahead of job market weakness. So now, investors are asking, how much will the job market slump, and how much worse could America’s debt troubles get as a result?

Problems at the consumer level have a direct effect on when the world’s financial centers will recover from their recent struggles because rising loan defaults mean more investment losses.

“With brokers and banks unable to commit capital, the credit crunch is increasing,” said Jane Caron, chief economic strategist at Dwight Asset Management. “If nonfarm payrolls start to decline, on trend . . . that’s going to worsen the outlook for the value of these structured finance products.”

As jitters about bond insurers continue to slam the market, the nation’s largest insurer -- American International Group Inc. -- dealt the stock market a blow Friday by revealing its largest quarterly loss ever. AIG lost $5.3 billion in the fourth quarter, mostly because of contracts known as credit default swaps, which pledge to cover missed debt payments.

After rising early in the week and then tumbling, the Dow Jones industrial average finished the week down 0.9%. The Standard & Poor’s 500 index fell 1.7%, and the Nasdaq composite index lost 1.4%.

Aside from better-than-expected economic data, calming words from Fed officials scheduled to speak this week -- and any positive news on the corporate front -- could help keep stocks afloat. But market watchers are not expecting volatility to let up anytime soon.

“Investors are quite concerned about the quality of balance sheets at banks and brokers, and about hedge fund blowups,” Caron said. “That will continue to keep investors gun-shy, not just in the week to come, but the month to come.”

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At a glance

Today

Institute for Supply Management releases its manufacturing index.

Major automakers report U.S. auto sales.

Commerce Department reports on construction spending.

Treasury Secretary Henry M. Paulson Jr. speaks to the National Assn. of Business Economists.

Tuesday

Quarterly earnings due from Staples Inc.

Wednesday

Institute for Supply Management releases its non-manufacturing index.

Labor Department reports on productivity and costs.

Commerce Department reports on factory orders.

Federal Reserve releases survey of regional economic conditions.

Quarterly earnings due from BJ’s Wholesale Club Inc., Costco Wholesale Corp., H&R; Block Inc., Saks Inc. and TiVo Inc.

Thursday

Labor Department reports on weekly jobless claims.

Freddie Mac reports on mortgage rates.

Quarterly earnings due from Blockbuster Inc.

Friday

Labor Department reports on employment.

Federal Reserve reports on consumer credit.

Sources: Times staff and wire reports