Employment report hits Wall Street

Wall Street fell sharply again today after the US government’s much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate.

The Nasdaq composite index, also pummelled by a downgrade of Intel, plummeted 3.7%, while the Dow Jones industrials fell 1.9%.

The Labour Department’s report that employers raised payrolls by only 18,000 and that the nation’s unemployment rate rose to its highest level since November 2005 unnerved investors, who worried that a weakening job market will hurt consumer spending and tip the economy towards recession.

A better-than-expected reading on the nation’s service economy briefly pulled stocks off their lows but was not enough to shake investors’ concerns.

Investors had been awaiting the jobs report for weeks as they tried to determine whether the economy would continue to benefit from robust consumer spending even as sectors like home construction, mortgage writing and manufacturing slow. Wall Street is concerned that areas of weakness could puncture growth if consumers cannot depend on a solid job market.

Manufacturers, construction companies and financial services companies all cut jobs during the month amid an anaemic housing market. Retailers also made reductions.

The December report showed employers added the fewest jobs to their payrolls since August 2003. Economists had predicted a jobs growth figure of about 70,000 and an unemployment rate of 4.8%. Instead, unemployment climbed to 5% in December from 4.7% in November. While 5% unemployment is still considered good by historical standards, the increase from November clearly made some investors nervous.

“It’s a scary number, no question about it. No matter how good you wanted to feel about the economy averting a recession, there is far less conviction than even two or three days ago,” said Joe Balestrino, senior portfolio manager at Federated Investors.

The technology-focused Nasdaq fell for the sixth straight session and showed its steepest percentage decline since a market pullback on February 27 last year. The Nasdaq declined 98.03, or 3.77%, to 2,504.65, in part after the downgrade of Intel, but also because its smaller-capitalisation components are seen as more vulnerable in an economic slowdown.

The Dow fell 256.54, or 1.96%, to 12,800.18, while the Standard & Poor’s 500 index declined 35.53, or 2.46%, to 1,411.63.

It was the steepest point drop for the Dow and the S&P 500 since Dec. 11.

The Russell 2000 index of smaller companies fell 23.44, or 3.14%, to 721.57 and hit a fresh 52-week low.

Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.65 billion shares, compared with 1.32 billion traded yesterday.

Bond prices rose as investors sought the safety of government-backed debt after the employment reading. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.87% from 3.89% last night.

A Federal Reserve announcement today that it is ramping up the amount of cash available to banks through a new auction process did little to calm the markets. After two auctions of 20 billion dollars each, the Fed has now scheduled auctions January 14 and January 28 at 30 billion dollars each.

The dollar was mixed against other major currencies. Gold prices, which have risen to nearly 30-year highs in recent days, declined.

The employment figures overshadowed a report from the Institute for Supply Management, a business group, which said its December index of non-manufacturing activity showed the US service sector grew in December.

However, the pace was slightly slower than in November and the index fell to 53.9 in December from 54.1 the prior month. Analysts had expected a deeper decline.

It has been a difficult start to 2008 on Wall Street. After selling off in the final session of last year on Monday, investors spent the first three sessions of the new year absorbing a weaker-than-expected reading on the manufacturing sector, oil that reached 100 dollars a barrel and Friday’s dismal employment numbers.

“It’s hard to point to any piece of data in recent weeks that makes you feel comfortable,” said Mr Balestrino, noting that many bullish investors had hoped a strong jobs picture would lift Wall Street’s mood.

“This the one piece that was holding up pretty well and now it’s showing some weakness as well,” he said. “In our business it’s not the absolute number, it’s the direction of the number and especially the direction versus the expectations.”

In corporate news, a JPMorgan analyst lowered his rating on Intel to “neutral” from “overweight,” citing a drop in chip orders from computer manufacturers during the fourth quarter and high inventories. Intel, one of the 30 stocks that comprise the Dow industrials, fell 2 dollars, or 8.1%, to 22.67 dollars.