Jobs Data Weigh Down U.S. Stocks

Updated from 11:37 a.m. EDT

Stocks in the U.S. were dealt a serious blow Thursday as grim sales reports from the retail sector and rising unemployment claims enhanced investor pessimism.

The

Dow Jones Industrial Average

dropped 241 points at 11,293, and the

S&P 500

lost 25 points to 1250. The

Nasdaq

stumbled 46 points to 2288.

The day's docket included a hefty serving of additional economic information. Automatic Data Processing's August employment figures showed private payrolls down 33,000, a slightly wider decline than estimates. The Department of Labor's jobless claims for the week ended Aug. 30 came in at 444,000, higher than expectations for 420,000 new claims.

The Labor Department's second-quarter productivity increased at an annual rate of 4.3%, ahead of estimates of 3.5% and up from 2.2% in the first quarter. Labor costs, meanwhile, declined at an annualized rate of 0.5%.

In one bright spot, the Institute for Supply Management's nonmanufacturing index came in at 50.6, up from 49.5 and ahead of analyst expectations. Weekly oil inventories from the Energy Information Administration are due out later.

Following the close of their respective rate meetings, the Bank of England and the European Central Bank both announced they would leave their key interest rates unchanged.

Recent declines in commodity prices should clearly be helping the market, said Paul Mendelsohn, chief investment strategist at Windham Financial. Other factors continue to hinder stocks' performance, he said. Investors are hesitant to buy ahead of tomorrow's employment report and may be taking additional time off during the holiday-shortened week, he said.

Regarding jobless claims, Mendelsohn said that investors will remain cautious as the unemployment number remains between 400,000 and 450,000. "If we get past 450,000 that would indicate the slowdown is really taking hold," he said.

Recent data, said Mendelsohn, leave investors uncertain about the economy's direction. "It's really been mixed, we've had good, we've had bad, it's really not conclusive." He said that exports have continued to bolster the economy, but a slowdown abroad may weaken exports in the future. Meanwhile, a slowdown in consumer spending continues to hinder the economy.

"The positive is ... those fundamentals are helping to create that drop in commodity prices," Mendelsohn said. "Eventually energy prices should come down to a level where the consumer feels comfortable and the economy can restart itself." He said that crude-oil prices need to dip into the $90-a-barrel range before the consumer feels an impact.

In company news, a slew of retailers reported same-store sales for August.

Wal-Mart

(WMT) - Get Walmart Inc. Report

showed improved sales that beat estimates, while specialty retailers such as

Wet Seal

(WTSLA)

,

Gap

(GPS) - Get Gap, Inc. (GPS) Report

and

Limited

(LTD)

reported declines in same-store sales.

Elsewhere,

Bloomberg

reported that

Merrill Lynch

(MER)

faces difficulties as it tries to sell parts of its loan portfolio to Korea Asset Management Corp.

Also dealing with hard-to-value assets, insurance giant

AIG

(AIG) - Get American International Group, Inc. Report

is considering forming a new company to get rid of its mortgage-related securities, according to a report in

The New York Post

.

Boeing

(BA) - Get Boeing Company Report

averted a strike by its largest union, the International Association of Machinists and Aerospace Workers. The union had voted to strike after negotiations for a new three-year contract failed, but federal mediators brokered a 48-hour postponement of the walkout.

As to earnings, after the close Wednesday tax-services provider

H&R Block

(HRB) - Get H&R Block, Inc. (HRB) Report

announced a narrowed quarterly loss. Homebuilder

Hovnanian

(HOV) - Get Hovnanian Enterprises, Inc. Class A Report

reported a loss that was wider than a year ago.

Fellow construction firm

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

likewise had bad news, swinging to a third-quarter loss on falling revenue stemming from the ongoing housing crisis.

Looking at commodities, the Energy Information Administration reported that inventories declined by 1.9 million barrels for the week ended August 30. Gasoline inventories were down by 1 million barrels. Crude oil was down $1.32 at $108.03 a barrel, and gold was losing $2 at $806.20 an ounce.

Longer-dated U.S. Treasuries were edging higher. The 10-year was up 12/32, yielding 3.65%, and the 30-year was adding 22/32 to yield 4.28%. The dollar was gaining on the euro and pound but slipping against the yen.

Major global exchanges, including the FTSE in London, the Dax in Frankfort, the Nikkei in Japan and the Hang Seng in Hong Kong, were mostly trading lower.