The American economy is looking increasingly likely to be heading into a recession, experts say. During testimony to the House Budget Committee yesterday, the director of the Congressional Budget Office, Peter Orszag, said the risk was “elevated,” while economists at Nomura Securities and Merrill Lynch published notes this week warning of the growing possibility.

“There is a two in three chance of a recession in the coming year,” the chief North American economist at Merrill Lynch, David Rosenberg, said yesterday in an interview.

These recessionary warnings are persisting despite some surprisingly strong employment numbers reported yesterday, which sent the stock market soaring. The private sector increased its payrolls by 189,000 workers in November — three times the estimated figure — according to payrolls giant Automatic Data Processing and consulting firm Macroeconomic Advisers. The news sent the Dow up 196.23 points, or 1.48%, to 13,444.96.

The ADP number, as it is known, is seen as a harbinger of tomorrow’s Labor Department employment figures. Those numbers are highly anticipated, because if they are strong, they could sway the Federal Reserve to forego a rate cut when it meets next week.

Meanwhile, President Bush yesterday worked to stem the flow of foreclosures that have erupted as a result of the subprime mortgage crisis. Mr. Bush will announce a plan this afternoon to implement a five-year moratorium on interest rate hikes for subprime borrowers, the Associated Press reported. The plan, which would apply only to homeowners who occupy their homes, would prevent any rate hikes on loans made at the start of 2005 through July 30 of this year, with rates that are scheduled to rise between January 1, 2008, and July 31, 2010, the report said. This could affect the estimated 1.8 million Americans who have taken out loans that came with low teaser rates that are expected to reset to much higher rates in 2008, according to the Federal Reserve. Half a million borrowers are at risk of losing their homes, according to officials estimate.

Despite this Band-Aid for the housing market and a strong ADP employment number, economists say the chance of a recession is strong.
“Economic activity has probably already slowed significantly, and the risk of a recession is now elevated,” Mr. Orszag testified to the House Budget Committee. “Recessions have often proved very difficult to foresee, or even to recognize in their early stages: Indeed, the apparently robust growth for the third quarter of this year may eventually be revised down.”

The ADP numbers also did not assuage economists’ concerns, with some market analysts dismissing the data as flawed. “The ADP numbers have not had a tight correlation over the past year with payroll growth, so we tend not to take it at face value,” the chief U.S. economist at Barclay’s Capital, Dean Maki, said. He has not revised his forecast for tomorrow’s labor numbers, which he estimates will show an increase of just 80,000 jobs.

Part of the flaw in the ADP number is that the majority of the data comes from estimates of how many new jobs have been created by new companies. Only 20% of the data actually comes from a survey that asks existing companies if they are hiring.

A more accurate indicator than the Labor Department figures is the household survey, which will also be released tomorrow, Mr. Rosenberg said. The household survey includes the self-employed, including consultants and contract workers, who are often laid off before full-time employees.

In the past four months, 534,000 self-employed workers have lost their jobs. “That is more than we lost in all of 2001 combined,” Mr. Rosenberg said. “Something is happening beneath the surface that isn’t showing up in payrolls.”

Not only did these many self-employed workers lose their jobs, but consumer confidence plummeted 25 points during the same four-month period.

“Last time consumer confidence dropped this much was when the stock market tanked in the fall of 2002; before that it was immediately following September 11; and before that it was when we were knee-deep in the 1991 recession,” Mr. Rosenberg said.

The chief economist at Nomura Securities, David Resler, is also skeptical of the ADP numbers. If tomorrow’s Labor Department numbers are similar to the ADP numbers, and also show strong job growth, Mr. Resler said there is a greater chance that the Federal Reserve will choose not to cut interest rates next week.

There were several other economic indicators that were also published yesterday, including the orders for manufactured goods, which rose 0.5%, and data from the Labor Department showing that worker productivity grew at an annual rate of 6.3% in the third quarter.

The ISM index of nonmanufacturing activity was also reported yesterday — it fell to 54.1 in November, the lowest reading since March and below the 57.7 lifetime average for the index. A subset of this index is nonmanufacturing new orders, which fell 4.6 points, to 51.1, its lowest level since April 2003.

“We’ve reached the point at which the conditions that could lead to a recession are now increasingly in evidence,” Mr. Resler said.