Exile on Main Street: Jobs Data Subdue Stocks

The bigger-than-expected jump in unemployment is a wake-up call for investors.
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A worse-than-expected jobs report served notice that while Wall Street might have an economic recovery in its sights, it's still elusive prey.

Nonfarm payroll employment fell 331,000 in November, the Labor Department said, about 140,000 more than was generally expected. Alongside the large loss in jobs was a rise in the unemployment rate, which increased from 5.4% to 5.7%, its highest level since August 1995.

"The employment data tell us the economy is not out of the woods yet," said Anthony Karydakis, an economist at Banc One, "contrary to what the markets had come to assume over the past few weeks."

Investors had their tails between their legs, with the

Dow Jones Industrial Average lately down 53 points to 10,046 after big gains earlier in the week. The

Nasdaq was off 28 points to 2026, but still ahead 5% in the past five days and atop 2000 for the third day in a row.

Tumbling Twice

Since the recession began in March, the economy has lost 1.2 million jobs, the Labor Department said. That compares with a loss of 1.4 million jobs during the first eight months of the last recession, which ended in 1991.The Labor Department revised the number of layoffs in October to 468,000, up from a prior estimate of 415,000, marking the worst two-month performance since 1980.

Even though the unemployment rate is considered a lagging indicator of economic activity -- it rose for a year following the recession in 1991 -- experts say there is more economic weakness to come.

"Those who thought the recession was nearly over got a rude wake-up call today," said Bruce Steinberg, chief economist at Merrill Lynch, in a research note this morning. "With profit margins at a post-World War II low, hundreds of thousands of more jobs probably need to go in order to restore profitability." As a result, Steinberg forecasts that the recession is likely to linger through the first quarter of next year.

"In the context of October's numbers, today's report paints a pretty dismal picture," said Karydakis. Nearly all industries saw a reduction in workers, with the steepest losses occurring in the manufacturing sector. With a burst in sales from interest-free financing offers, automakers were one of the few industries to add workers.

Got To Move

Today's data improve the chances of more aggressive monetary and fiscal policy. "It puts pressure on the government to act more aggressively," said Brian Fabbri, an economist at Paribas Capital Management, "for the Fed to ease again and for Congress to legislate an economic stimulus program." The central bank is widely expected to cut interest rates by 25 basis points when it meets on Dec. 11.

Several companies set plans for workforce reductions in November,

IBM

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,

Citigroup

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, and

Motorola

(MOT)

. According to outplacement firm Challenger, Gray & Christmas, companies announced plans to cut 181,412 jobs in November, a decline of 25% from October's 242,192. November was still the sixth month this year that planned job cuts were above 150,000.

The scant good news in the employment report: Total hours worked, a proxy for the change in output in the economy, fell 0.1%. And average hourly earnings rose 0.3% in November, compared with an increase of 0.1% in October. Personal income is considered a good gauge of what ultimately happens with consumer spending.

Happy

In a separate report today, the University of Michigan's consumer sentiment index rose for the third month in a row to 85.8 in early December from 83.9 in November. Analysts had expected a reading of 84.1.

The confidence data come on the heels of a slew of weak retail sales reports, but continued strength in the housing market. According to the latest poll by the Conference Board, a private research firm, consumer confidence fell in November. That survey asks consumers to rate labor market conditions and prospects for job growth.

Treasury bond prices also were falling for the third day in a row, with the benchmark 10-year note lower 30/32 to 98 31/32, lifting its yield to 5.13%. For the most part, analysts attributed the weakness to a year-end cleanup. "It's been a good year for the market," said Ken Logan, a Treasury market strategist at IFR/Thomson Financial. "People have decided to give some money back, not wanting to take any risks at the end of the year."