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The war between the intangible and tangible sectors of the U.S. economy is over—and intangibles have won. Since the economy went into recession a year ago, the industries producing or distributing physical or tangible goods—including construction, manufacturing, retail trade, and transportation—have lost an astounding 1.8 million jobs. That includes a decline of 260,000 jobs in the much-beleaguered auto industry and its dealer network, and a drop of 300,000 in residential construction employment.

Meanwhile, the intangible sector, which includes such industries as education and health care, has received far less attention than autos and housing. But since the recession start date of December 2007, the intangible-producing industries have gained about 500,000 jobs.

In fact, today's troubles in autos and housing are indications of a long-term shift: The U.S. economy, in part because of globalization but also because of the nature of knowledge-based growth, has been moving toward producing outputs that have long-lasting effects but don't have a solid and visible forms. One such intangible produced by the education system is human capital, which is another phrase for the long-term value of education. Another important intangible is intellectual capital, which is the accumulation of scientific knowledge, business and financial knowhow, and artistic accomplishments. Finally, the U.S. is spending heavily on building up health capital. That's the dollar value of a person's lifetime health, according to David Cutler, a Harvard University economist and a key adviser to President-elect Barack Obama.

These intangibles—critical for today's knowledge-based economy—are not well measured by the gross domestic product figures produced by the Bureau of Economic Analysis. However, intangibles do produce jobs. Consider the last business cycle, which ran from March 2001 to December 2007. Over that stretch, health and education alone added 3.5 million jobs, roughly 63% of all the net jobs produced by the economy. Altogether, the intangible sector accounted for about 75% of job growth. By comparison, the tangible sector, led by manufacturing, lost some 1.8 million jobs over the same period.

A Fine Line?

Of course, this division between the tangible and intangible sectors is a bit messy in practice. Some manufacturing companies, such as Intel (INTC) and IBM (IBM), are big producers of intangibles in the form of research and technological knowledge. Oil companies, which are dedicated to the tangible act of drilling for crude, also invest heavily in the intangible knowledge of where to find the oil. At the same time, the intangible sector is not immune to the downturn. Publishing is losing jobs, as newspapers, magazines, and book companies wrestle with the shift to digital formats. And finance is experiencing big job losses, which will only accelerate in the coming months. Education and health-care spending, meanwhile, is tied to state and local budgets, which are likely to crater without help from the federal government.

But at least so far, the intangible sector, notably health care, has remained remarkably buoyant. In September 2006, I predicted that 30% to 40% of all new jobs created over the next quarter-century would be in health care. That long-term forecast turned out to be an understatement in the short run. Since that story was published, health care has added roughly 800,000 jobs, while employment has declined sharply in the rest of the economy.

For Obama and his incoming Administration, the question is whether the shift to intangible production is a sustainable economic strategy over the long run. Better education, improved health, and more research are clearly necessary to be globally competitive. But it's not clear yet whether a country such as the U.S. can afford to let all its tangible industries shift abroad. That's why Washington is grappling with the knotty problem of spending billions to save the domestic automakers. But Americans who want jobs have no such dilemma. For them, intangible is the way to go.

Mandel is chief economist for BusinessWeek.

Household spending and investment in big-ticket items plummeted in October in the United States, as major world economies announced new plans to try to boost demand to fight a deepening economic downturn.

FINANCIAL MARKET SUMMARY
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	DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01    DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01

Personalize Ticker | Updated 4:00 PM, 10/16/2008	Disclaimer | © MarketWatch Inc. Source: Interactive Data Corp

The Dow Jones industrial average was down as much as 376 points at one point, but closed up 4.7 percent, or 401 points, at 8,979. The Standard & Poor's 500-stock index gained 4.3 percent, or 39 points, to end the day at 946.

The tech-heavy Nasdaq rose 5.5 percent, or 89 points, to 1,718. It was helped by a 10.5 percent surge in Yahoo's share price. The Internet firm received a boost from reports that Microsoft's chief executive, Steve Ballmer, said a deal between the companies might still make economic sense. Yahoo rejected a previous offer from Microsoft, which closed up 6.8 percent. Both firms were among the most actively traded companies in the Nasdaq today.

There is a battle between investors who are confident stocks have reached their bottom and others who see more downside to come amid gloomy economic data and corporate earnings. "This is a sucker's rally," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. "There's a very difficult period ahead."

Today's gains follow the markets' huge dive yesterday, when the Dow fell more than 700 points.

Analysts said investors no longer question whether there will be a recession, but instead are worried about how long it will last and how deep it will be.

The government's responses to the financial crisis, from lowering interest rates to taking stakes in major banks, are good steps toward stability, economists and analysts have said. But they do not address the more immediate economic problems and have yet to drastically impact the credit squeeze as lenders remain reluctant to lend to each other.

Market volatility has become the new norm, said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research. "Right now people are worried things are going to fall off a cliff. Every bit of news moves the market," he said.

Economic data released by the Labor Department today was mixed. New claims for jobless benefits dropped by 16,000 last week to a seasonally adjusted 461,000. That was a bigger drop than expected, but unemployment claims remain high by historical standards. And consumer prices were flat in September, according to the Consumer Price Index, a closely watched barometer of inflation.

Two Federal Reserve-related reports today painted a more bleak economic picture. Factory activity in the mid-Atlantic region is experiencing its largest one-month decline this month, according to the Federal Reserve Bank of Philadelphia, and the region's manufacturing executives expect no growth during the next six months. Also, the Federal Reserve reported today that industrial production fell 2.8 percent in September, the biggest plunge since December 1974.

"While the collapse in the U.S. housing sector and simultaneous drop in consumer confidence has prompted U.S. manufacturers to cut back sharply this summer, it has been the recent banking crisis and credit freeze that has turned the manufacturing recession into a outright collapse," said Michael Woolfolk, senior currency strategist for Bank of New York Mellon, in a research note this morning.

The collapse in industrial production parallels the sizable drop in retail sales released yesterday, punctuating the onset of a recession, analysts said. Retail sales in September took their steepest monthly decline in three years, according to a report released yesterday. Those concerns were amplified by Nation Retail Federation survey today showing that consumers planned to increase holiday-related shopping by 1.9 percent this year, a paltry sum that is the smallest increase since the survey began in 2002.

Investors have also been spooked by the impact of the financial crisis on many firm's balance sheets and their outlook through the rest of the year. Merrill Lynch, which is being acquired by Bank of America, reported a $5 billion loss during its third quarter this morning, while Citigroup reported a loss of $2.8 billion. Both firms have been battered by the credit crisis.

Merrill Lynch was basically flat, registering a 0.6 percent gain, and Citigroup was down 2 percent.

The financial crisis also continues to help drive down crude oil prices as the economic turmoil saps demand. The price of oil fell 6 percent, or $4.55, to $70 a barrel today. Before yesterday, oil had not traded below $75 a barrel in more than a year. But with demand dwindling, many analysts now expect prices to fall to as little as $50 a barrel.

The financial crisis also continues to churn overseas. Swiss authorities moved to stabilize financial giant UBS today, agreeing to move $60 billion in troubled assets from the company's books into a special government-backed fund.

Foreign markets were down. London's FTSE 100 and the CAC 40 in Paris were down more than 5 percent, and Germany's DAX fell 6.7 percent today. But the losses were larger in Asia as the Nikkei stock average in Japan closed down more than 11 percent.

PHOTOS: Major Shakeup in Financial Sector

Central banks pumped tens of billions of dollars into the global financial system today in an effort to ensure that banks and financial firms have adequate cash to operate through the current crisis, while global stocks continued falling in the wake of Wall Street's weekend shakeup.

From Tokyo to New York, central bankers continued a second day of larger-than-normal cash infusions, as financial institutions clamored for the short-term loans they need to operate. In calmer times they often get that cash from one another, but given the widespread sense of crisis, the interest demanded for such loans spiked overnight -- hitting as much as 6 percent, far above the target rate of 2 percent established by the Federal Reserve.

The New York Federal Reserve said this morning that it had put an additional $50 billion into the banking system -- part of a global wave of liquidity offered by its counterparts in other countries. The European Central Bank added about $100 billion to the system, Tokyo $24 billion, and London $36 billion.

The banks had taken similar steps yesterday, with the Fed adding some $70 billion, the most since the Sept. 11, 2001, terrorist attacks.

Stabilizing the day-to-day operating environment for banks, however, did little to stop a global stock sell-off triggered by the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company and the shaky state of American International Group, the U.S.'s largest insurance company.

The Dow Jones industrial average fell more than 160 points in the opening minutes of trading, adding another roughly 1.5 percent decline to the 4.4 percent, 500 point drop yesterday. The Standard & Poor's 500-stock index and the Nasdaq experienced similar losses. But all three moderated by midmorning.

A new profit report from Goldman Sachs showed that it is possible to make money in the current environment. The investment bank, which has fared better than many in the turmoil caused by the troubled mortgage industry, said it earned about $845 million in its recent quarter -- a steep decline from its results of a year ago but better than analysts expected.

There was good news on inflation as well: Consumer prices fell 0.1 percent in August, the federal government reported, as a decline in energy costs helped reverse sharp price increases during July and August.

That could figure into Federal Reserve policy discussions this morning, as the central banks weighs whether an interest rate reduction is needed to boost an economy where rising unemployment and falling production are now twinned with a sense of full-blown upheaval in the financial sector.

But it might be all but lost in a flow of events that remains fast-developing. Under close scrutiny: efforts to set up a loan facility for AIG, hit by its exposure to mortgage-related investments, and an announcement by Barclays that it might try to buy a portion of Lehman Brothers out of bankruptcy.

Stock markets in Asia hit two-year lows today, and European exchanges were headed for a second day of steep losses.

Asian markets were closed yesterday but reacted sharply to recent events when they reopened.