The Dow's Triple Digit Tumble
Friday, September 07, 2007SUSIE GHARIB: Troubling news today from the Labor Department sent stocks falling on Wall Street. The government said for the first time in nearly four years, U.S. payrolls declined as American employers cut back on hiring in August. The news surprised economists and investors. The Dow tumbled almost 250 points, the NASDAQ fell 48, on concerns that problems in housing are spilling over to the rest of the economy and could trigger a recession. We have two reports looking at today's employment data and how the Federal Reserve is likely to respond. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The debate over the health of the economy took a sharp turn this morning with the release of the employment report for August. For the first time in four years, payrolls fell for the month. Employers cut 4,000 jobs. Economists had been expecting them to add more than 100,000. In addition, the Labor Department made big revisions cutting payroll numbers for June and July. A separate household survey found the unemployment rate holding steady at 4.6 percent. But economists attributed this to the fact that the survey shows a large number of people stopped looking for work. Josh Feinman, chief economist at Deutsche Asset Management, warns against reading too much into one report.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: You need to see several reports like this before you could be definitively sure that we have shifted dramatically. But, it certainly raises that possibility. So, on average, over the last several months, private sector employment growth clearly has slowed down.
GURVEY: The biggest declines were in manufacturing and construction. Government jobs declined by 28,000; an increase had been expected. There were gains in the service sector with increases in retail jobs, health care and food services. The markets have been calling for a Fed funds rate cut and Fed watchers say today's report makes such a cut more likely. Bond prices were up and yields down in today's trading. But stocks sold off on the news, with traders concerned that an economic downturn will affect corporate earnings. Equity strategist Tony Dwyer at FTN Midwest says the market is worried more bad news is coming.
ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: The only real bull market killer is when you have negative earnings. You get negative earnings in a recession and that's led by negative job growth a lot of times. Now we don't think a recession is coming, but that's the fear.
GURVEY: Some cities are already worrying about a downturn. New York is considering a hiring freeze in anticipation of falling revenue. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh reporting. For Ben Bernanke and his colleagues, analysts say the question now is not whether to cut interest rates, but how much. Political economist Tom Gallagher says the downward revision in June and July employment shows hiring was weakening even before the financial market meltdown, a fact that will influence Fed thinking.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: That tells you that the trajectory was already weak and it's been bumped down even further, so I think this is an important data point for the Fed. It really tells them that their forecast for the economy was too strong and they now have to have a weaker forecast which I think will push them toward cutting rates.
GERSH: Former Federal Reserve Governor Lyle Gramley expects the central bank will shave a quarter percentage point off its benchmark interest rate at its September 18 meeting, in part because it can't afford to seem asleep at the switch. But Gramley says the case for a half a point cut hasn't been made.
LYLE GRAMLEY, SR. ECONOMIC ADVISER, STANFORD WASHINGTON RESEARCH GROUP: August retail sales numbers will probably be half-way decent. We know that auto sales seasonally adjusted were up. These chain store sales figures look half-way decent. So we haven't seen the deterioration in consumer spending yet which would lead them to the conclusion that they had to really push the button hard.
GERSH: Pressure to do more is growing on Wall Street and Capitol Hill. Congressman Barney Frank chairs the committee that oversees the Fed. Frank called on Bernanke to make a meaningful cut in rates and keep in mind that the law requires the Fed to both control inflation and maintain employment.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: This is really a test of the Fed. Do they really take the dual mandate seriously? Are they equally concerned about maintaining inflation and maintaining adequate employment, because a failure to recognize that now would be very serious.
GERSH: For now, Fed officials are still worried an aggressive rate cut would encourage investors to believe they'll be bailed out whenever markets turn south. But that worry could fade if we get more economic numbers like the one today. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
