WASHINGTON — After a spate of bad economic news and a 10-day pounding of stock prices, Fridays jobs report is likely to play an outsized role in either calming the waters or deepening fears that the U.S. economy is sliding back toward recession.
Stocks plummeted Thursday as investors fretted about weakening economic conditions and emergency steps announced by the European Central Bank that only heightened worries that big economies, led by Italy and Spain, are in deep trouble.
The Dow was down more than 300 points much of the day, and it plunged at the end to finish the day down 512.76 to close at 11,383.68. The S&P 500 fared no better, off 60.27 points to close at 1,200.07. The tech-heavy Nasdaq fell 136.68 points to end at 2556.39. Thursdays plunge followed a breather Wednesday that broke an eight-day slide, the worst since October 2008, when the U.S. financial system was in meltdown.
Stocks led a broad selloff across financial markets that offered investors no place to hide. Gold and silver prices fell, as did crude oil and other commodities. Investors sought safety in U.S. bonds, with the yield, or interest rate, falling on 10-year bonds. The yield on one-month Treasury bills briefly went negative. That meant investors were willing to lose money by holding these bills, betting that it would represent a smaller loss than holding other financial assets. Yields on two-year Treasuries also hit a record low.
The financial-market volatility heightens attention to Friday's Labor Department monthly report on jobs, which has been dismal for two consecutive months. Perhaps surprisingly in light of the recent run of bad economic news, there are reasons to think the July jobs report may reverse the skid, with most forecasters projecting growth in the range of 90,000 to 120,000 new jobs.
Wednesdays ADP National Employment Report, which gauges private payrolls, estimated that 114,000 private-sector jobs were created in July. The ADP report at times has been a good gauge for the government report that comes two days later, but at other times it's misfired wildly.
Another positive sign for jobs came Thursday, when the government reported that during the week that ended July 30, first-time claims for unemployment benefits were little changed at 400,000. That was lower than had been forecast, and the four-week average for these claims is at the lowest point since mid-April.
If roughly 100,000 jobs were added in July, that wouldnt be enough to knock down the unemployment rate, a painful 9.2 percent in June. But after only 18,000 new jobs were reported in June and a subpar 54,000 in May — later revised down to just 25,000 — a triple-digit monthly gain would look and feel like up.
By most accounts, the economy is at a turning point: It could slide into recession or it could reaccelerate.
There are some positive indicators, including strong July retail sales by big chain stores such as Target and Costco. And General Motors reported Wednesday that July sales surpassed the same month last year by 7.8 percent.
Those positive signs were dampened by the Commerce Departments report Tuesday on real income and consumption. It showed wages and income flat, and consumption down for the first time in two years, as consumers and businesses sat on the sidelines, boosting their savings.
That followed a glum report last Friday that second-quarter growth in the United States was up by only a sluggish 1.3 percent, and first-quarter growth was revised down to just 0.4 percent.
Thursday brought another troubling sign when the RBC Consumer Outlook Index showed consumer confidence slumping for the second straight month. The survey showed that 60 percent of Americans said in July that they were less comfortable making major purchasing decisions than they were six months before. Thats 12 points higher than the previous months survey.
It all has many economists worried about a double-dip recession.
Are we in a recession, again? asked the title of a research note Thursday by economists at Bank of America Merrill Lynch in New York.
As the economic data continue to disappoint, we become more worried about the strength of the recovery. We took a sledgehammer to our forecasts last week, and now look for below-potential growth through the end of next year, Michelle Meyer and her fellow economists wrote. A lower growth trajectory brings greater risk of dipping into recession. We now believe there is a 35 percent chance of recession in the next year, about double where we put the odds this spring.
The U.S. economy this year already has weathered a sharp spike in oil prices, supply-chain woes caused by Japans devastating earthquake, European financial turmoil and a self-inflicted wound to confidence from Washingtons manufactured threat of a default on the national debt.
All this led Meyer to warn that the economy is one shock away from falling into recession.
What to do?
The debt-ceiling compromise painfully reached by Congress and the White House ensures that there wont be new federal spending to boost the economy. State and local governments continue to shed jobs. President Barack Obama is touting passage of trade deals with Colombia, Panama and South Korea as a potential spark, along with another year of waiving payroll taxes.
I think there is one possibility they have not brought to the table, and thats a tax holiday for repatriation of profits from corporations with overseas operations, said Beth Ann Bovino, a senior economist at Standard & Poors in New York. Since it is tax-related, thats something that could get through Congress.
Martin Regalia, the chief economist for the U.S. Chamber of Commerce, thinks there isn't much more government can do now, beyond promoting pro-growth policies that have a payback later.
We have focused way too much on these sorts of artificial respiration-type approaches rather than getting the patient into a good environment where it would repair itself, he said.
The question of what to do weighs heavily on Federal Reserve Chairman Ben Bernanke. The Feds interest rate-setting Open Market Committee meets again next week, but most analysts see the central bank as almost out of bullets.
The Fed in June ended its protracted purchase of $600 billion in Treasury bonds, a process — called quantitative easing and dubbed QE2 — designed to spark economic activity. Its unlikely that the Fed will go beyond what it's already purchased.
Surely Bernanke & Co. will do something to save the day. They probably will, but their credibility is shot, because theyve already shot their big guns, Ed Yardeni, a veteran economic analyst, wrote in a research note Thursday. QE2.0 should have been saved for when it might be really needed, like now rather than six months ago.
During mid-July testimony to Congress, Bernanke signaled that he wasnt out of ammo. Bovino, the Standard & Poors economist, thinks the Fed might choose to exchange the shorter-term bonds it purchased during QE2 for longer-term bonds, creating even lower short-term interest rates than they already have.
The Feds benchmark federal funds rate has been at zero since December 2008, and corporations are flush with cash and profitable. Banks are sitting on reserves rather than lending to consumers, who are paying down debt and boosting their savings. Its not clear how much help even-lower interest rates would be.
The Fed is basically in a bind. It is where the fiscal policy (normally) is going to come in place, and that doesnt look like it's going to be an option, Bovino said.
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