Coming Week: The Nail in the Coffin?

This week's employment report could signal the end of the five-year U.S. economic expansion.

Despite the cacophony of lousy news weighing on stocks, a few hardy souls are clinging to optimism based on the premise that the unemployment rate remains low. As long as people are working, the thinking goes, the U.S. economy can muddle through this credit crisis. Even Federal Reserve Chairman Ben Bernanke forecasts that economic growth will continue -- albeit at a snail's pace -- through 2008, and even pick up in the back half of the year.

GDP data from the fourth quarter shows slow growth in place at the end of last year, but that's old news now, and a growing chorus of investors reading the tea leaves are concluding that the U.S. is now in a recession.

January's employment data, which showed the first decline in nonfarm payrolls on record in more than four years, bolstered their case, and another decline in February could make it all but airtight.

Economists on Wall Street are expecting the Labor Department to report a gain of 40,000 new jobs in February before Friday's opening bell, along with an uptick in the unemployment rate to 5% from January's 4.9%. That would mark a turnaround from January's job loss of 17,000 nonfarm payrolls, and it could leave embattled stocks some room to rally. Best of all, the January figures could be revised up to show continued growth.

Such was the case last August when the government reported a loss of 4,000 jobs for the month, only to revise it higher later in its customary revision process. James Bianco, president of Bianco Research, says this time around will likely be different.

"Our research says we're already in a recession, and we're not expecting the economy to have added any jobs in February," says Bianco.

Dour as Bianco's assessment may sound, his forecast does line up with all the negative signs that are emerging from corporate reports and economic data, and the markets themselves are foretelling bad tidings. Oil and gold prices -- along with those for many other commodities -- are through the roof, while the value of the dollar is dwindling at a time when the Fed's monetary spigots are wide open.

Stocks have declined for four straight months, with the S&P 500 losing 3.5% in February. Just last week, the Dow Jones Industrial Average shed 0.9%, while the Nasdaq Composite was off 1.4%; the S&P closed down 1.7%.

Inflation rates are rising across the board. Consumer spending is weakening, while home foreclosures are spiking. The downturn in the all-important U.S. housing sector, worse than any on record since the Great Depression, shows no sign of abatement.

The Fed's own assessment may be more political than substantive, because the central bank is probably the last forecaster that would ever use the R-word. In all of his recent statements, Bernanke emphasized that risks to his forecast are "to the downside."

If the Fed really expected the economy to keep growing in 2008, it seems unlikely that it would have slashed its fed funds rate so dramatically in recent months at a time when inflationary pressures are building.

"No Fed chairman wants to be remembered as one who was pressured by investors into letting inflation get out of hand," says Bianco.

The drumbeat is set to continue Monday, with the government expected to report a 0.8% decline in construction in January; the Institute for Supply Management is expected to report that its manufacturing index dropped to 49 in February -- a reading that would indicate a contraction.