Jobs Data, 3M Crush Dow

Updated from 4:07 p.m. EDT

Stocks closed sharply lower Friday as a warning from industrial conglomerate 3M ( MMM) combined with a mixed employment report to foster recession anxiety.

The Dow Jones Industrial Average finished down 134.63 points, or 1.2%, to 11,090.67, and the S&P 500 lost 8.60 points, or 0.67%, to 1265.48. The tech-laden Nasdaq Composite dropped 25.03 points, or 1.16%, to 2130.06, partly owing to a soft forecast from chipmaker Advanced Micro ( AMD).

"Today showed the market's obsession with rising inflation and slower economic growth," said Jay Suskind, head of institutional trading with Ryan Beck. "This isn't a good recipe for equities. There was light volume as well, so there weren't as many players around. The tone, even with the light volume, was certainly negative and there was no escaping that."

About 1.43 billion shares changed hands on the New York Stock Exchange, with decliners outpacing advancers by a 5-to-3 margin. Volume on the Nasdaq was 1.77 billion shares, and losers beat winners 11 to 4.

The Dow finished the week lower by 60 points, or 0.5%, and the Nasdaq dropped 42 points, or 1.9%. The S&P 500 was lower by 5 points, or 0.4%.

Before the opening bell, the Labor Department said the economy added 121,000 jobs in June, while the unemployment rate held steady at 4.6%. Economists anticipated a gain of 200,000 jobs. Average hourly earnings, a key inflation metric, rose a higher-than-expected 0.5%.

"The lower-than-expected jobs created number is favorable, but the average hourly earnings data is concerning," said Paul Mendelsohn, chief investment officer with Windham Financial. "It shows that employment is slowing down and that wages are rising. This isn't the best-case scenario."

As always, the employment numbers will be taken as a crucial read on the pace of growth in the U.S. economy and, in turn, the future of Federal Reserve interest rate policy. Last week, the Fed raised its benchmark lending rate a quarter point to 5.25% and said additional moves would depend on the character of incoming economic data.

To view Gregg Greenberg's video take on today's premarket action, click here .

Since June 2004, the central bank has been on an inflation-fighting crusade, increasing short-term rates at 17 straight meetings, by a total of 425 basis points from 1%, in an effort to stave off rising prices.

"Inflation is building, which will worry the Fed," said Mendelsohn. "We're not growing jobs at the full capacity of the economy. With oil prices higher again, I'm not sure this report really makes it clear which way the Fed will lean."

Following the report, the futures market was pricing in 64% odds of a rate increase at the August Fed meeting, down from 81% before the data were released.

Marc Pado, U.S. market strategist with Cantor Fitzgerald, said that even though "today is all about employment, this is a backward-looking number. Earnings will be more important starting next week. We simply need to get this number behind us."

Bonds rose after the jobs data, with the 10-year Treasury up 11/32 in price to yield 5.13%, compared with 5.18% before the report. The dollar fell against the yen and the euro.

Disappointing quarterly estimates from 3M, a company whose operations touch numerous areas of the economy, troubled traders and contributed to lingering concerns that the Fed is running the risk of lifting rates too high.

3M said its second-quarter sales would be around $5.7 billion, an increase of 7.5% to 8% from last year. Still, excluding the impact of acquisitions, divestitures and foreign currency fluctuations, sales growth will be near the low end of the company's previous guidance of 5% to 8%. The stock slid $7.29, or 9%, to $74.10 and was the biggest drag on the Dow.

Along with 3M, AMD also offered up discouraging numbers. The company's stock lost 1.1% after it pegged second-quarter sales at $1.22 billion, about $90 million below the Wall Street consensus. A sequential decline in sales of desktop computers and some mobile devices was behind the decline. Shares were lower by 27 cents to close at $23.54.

Both Intel ( INTC), AMD's chief competitor, and Dell ( DELL) also finished the session lower.

Oil, which rose to a record $75.55 a barrel in trading earlier, was weaker Friday. The move came a day after the Energy Department reported a 1.4% rise in gasoline consumption last week compared with a year ago. Crude tumbled $1.05 to finish at $74.09 a barrel.

Precious metals also traded lower. Gold fell $1.50 to close at $634.80 an ounce, and copper lost 7 cents to $3.55 a pound.

By sector, one of few winners was the Philadelphia Utility Index, which gained 0.9%. The Philadelphia Semiconductor Sector Index fell 1.6%, the Philadelphia Gold & Silver Index closed down 1.4%, and the Nasdaq Computer Index dropped 1.2%.

General Motors ( GM) continued to be a market focus. On Friday, directors of the No. 1 U.S. automaker will take up a proposal to align with Nissan and Renault that is backed by 10% holder Kirk Kerkorian. Prospects for such an alliance led Deutsche Bank to raise its rating on GM shares to hold from sell Friday. GM rose 28 cents, or 1%, to $29.48, one of only seven Dow components finishing with gains.

Deutsche Bank also offered a broad call on the optical networking sector Friday, initiating JDSU ( JDSU) and Bookham ( BKHM) at hold and Finisar ( FNSR) at buy.

JDS Uniphase was down 6 cents, or 2.5%, to $2.31, and Bookham was lower by 7 cents, or 2.2%, to $3.10. Finisar added 17 cents, or 5.6%, to $3.20.

Shares of Starbucks ( SBUX) lost 4.9% after the coffee store chain reported same-store sales growth of 6% in June. Analysts polled by Thomson First Call were expecting a gain of 7%. Shares ended down $1.84 to $36.04.

Overseas markets were mixed. London's FTSE 100 was unchanged at 5889, and Germany's Xetra DAX fell 0.2% to 5682. In Asia, Japan's Nikkei rose 0.1% overnight to 15,308, and Hong Kong's Hang Seng tacked on 0.1% to 16,460.

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