Stock market volatility: Dow jumps on jobs report, plunges, then rises again

The US economy added more jobs in July than Wall Street economists had expected, giving an early-morning boost to the stock market Friday following the Dow Jones Industrial Average’s 512 point tumble on Thursday.

But the gain was short-lived. By noon Friday, the Dow appeared to resume its freefall of the day before, dropping more than 220 points – a downward swing of nearly 400 points after gaining 164 points at the opening of trading. Then news that Italy had agreed to fiscal reform – European fears had fueled Thursday's fall – resulted in a sharp rally on Wall Street on a day of extreme volatility.

It could have been worse if the economy had actually lost jobs.

“If the numbers had come in on the soft side, it would have been a very dark day,” says Mark Zandi, chief economist at Moody’s Analytics.com in West Chester, Pa.

Despite the glum financial markets, some economists said the job gains were at least a brighter light for the economy. According to the Department of Labor, the nation added 117,000 jobs last month. The government also revised slightly upward the job gains for May and June.

The relatively modest increase in jobs, however, indicated that the economy is growing slowly.

At the same time as the economy added jobs, the unemployment rate in July dropped to 9.1 percent from 9.2 percent in June. But, the main reason for the slight drop was a reduction in the number of people who say they are looking for work. “It highlights how soft the job market remains,” says Mr. Zandi.

The better-than-expected jobs numbers gave Zandi hope that the US economy would dodge a recession next year.

“The overarching message is that we will skirt a recession,” he says, “unless we get nailed by something off our radar screen.”

However, some other economists think it might be too early to rule out an economic downturn. One of those is Nigel Gault, chief economist at IHS Global Insight in Lexington, Mass. who raised his probability of a recession from 33 percent to 40 percent on Friday.

“The economy is running pretty close to stall speed,” he explains. “When you are that weak, you run the risk of a downward spiral of confidence and activity. It does not take much of a shock to go from stall speed to outright recession.”

Although Mr. Gault says it was a relief to get a better jobs report in July, he thinks the August numbers are likely to be worse since they will reflect the uncertainty that built up during the debate over raising the debt ceiling.

“I would be surprised if we sustain the uptrend,” says Gault.

In Washington, the White House reaction was somewhat predictable. In a statement on Friday, Austan Goolsbee, chairman of the Council of Economic Advisors, called for bipartisan action in a number of areas such as extending the payroll tax cut, which expires this year, and extending unemployment insurance benefits.

On the opposite side of the political fence, in a statement, House Speaker John Boehner said the July jobs numbers show “Washington spending, taxing and regulating is devastating our economy.”

In some past recessions, one of the leading indicators is the temp job industry, points out Roy Krause, CEO of SFN Group, a major supplier of temp labor, based in Ft. Lauderdale, Fla. For example, prior to the Great Recession, the temp job industry contracted for over a year before the economy actually was officially declared in a downturn. That is because businesses often lay-off their temporary workers before they give pink slips to their permanent staff.

“That is not what is happening now,” says Mr. Krause, adding the industry is still growing at about 7 percent. Last month the industry added 3,000 jobs, after dropping 11,600 in June.

Krause says he is optimistic because corporate profits are still strong, companies have large stockpiles of cash, and they are buying back their own stock because they view it as a good investment. Last month, the Department of Labor says private business added 154,000 new jobs.

In fact, Krause says it appears business is not shelving its normal plans to add workers in the third and fourth quarters for back-to-school sales and holiday sales. “Maybe they won’t be expanding or growing as fast,” he says. “But, with economic growth at 1.5 percent to 2 percent, we’re not in a recession.

Over the past year, the health-care sector has remained one of the brighter segments, adding 299,000 jobs, according to the Department of Labor. Last month, health and personal care stores added 9,000 positions as part of a gain of 26,000 retail jobs in July.

In July, as the auto industry recovered from a part shortage due to the earthquake and tsunami in Japan, it also increased employment, adding some 24,000 positions at a time when it would normally be seasonally reducing its workforce, according to the Department of Labor.

However, the government sector remained a drag on the jobs market with a net reduction of 37,000 jobs. However, that should improve next month since 23,000 of those jobs were due to the shutdown of the Minnesota government, which is now back at work.