By Jason Simpkins
For U.S. Federal Reserve Chairman Ben S. Bernanke and policymakers at the central bank's Federal Open Market Committee, the verdict is in.
A mediocre – or even week – jobs report for the month of August might have been enough to secure an interest-rate cut at the FOMC's Sept. 18 meeting. But investors who were wishing for just such a scenario got more than they bargained for with the release of an abysmal employment report on Friday. The cries of "Recession!" could be heard up and down Wall Street. And now Bernanke & Co. may be forced to provide relief in the form of a rate cut. The only question now is how big that rate reduction will be.[To read the Money Morning news analysis on Friday's jobs report – and the stock-market opportunities it may create – click here].
The economy shed 4,000 jobs last month marking the first decline in payrolls in four years. The number of jobs added in June and July was revised downward.Â June's increase was reduced by 57,000, and July's by 24,000. Factory payrolls took the biggest hit in August, dumping 46,000, the most since 2003. After losing 14,000 jobs in July, the building industry cut another 22,000.Â Despite the losses, however, unemployment remained unchanged at 4.6%.
Investors reacted violently.
The Dow Jones Industrial Average plunged 249.97 points, or 1.87%, to close at 13,113.38. The Standard & Poor's 500 dropped 25 points, or 1.69%, to close at 1,453.55. The tech-laden Nasdaq composite index dropped 48.62 points, or 1.86%, to close at 2,567.70.
The jobs report had been highly anticipated because the payroll report is considered a very good early indicator of an oncoming economic contraction.Â There had been a great deal of uncertainty in the weeks leading up to the report's release, and rampant speculation about whether or not the Federal Reserve would cut the main interest rate. Earlier this week, it appeared to be a win-win situation. If the jobs report were good, it would have meant that the economy was coping well with credit hardships and a weak housing market.Â A weak jobs report would have forced the Fed to act, but a report this negative caught just about everyone off guard.
So, now, the floor is open to discussion concerning just what kind of shape the economy is in, and what the Fed should do about it.
According to Joel Naroff, president and chief economist of Naroff Economics: "The job situation has turned dramatically, removing any impediment to a Fed ease."
In fact, it's no longer a question of the Fed having to prove it's not playing to Wall Street speculators or private investors who tried to make a big score on a house.
"This report is weak enough that the Fed has to show it is getting out in front of the weakening economy and not lagging behind, as it had been," Naroff said.
Economists at Goldman Sachs Group Inc., (GS) adjusted their prediction for the Fed's next move, raising their rate-cut forecast to half a percentage point.
In an e-mailed statement, Representative Barney Frank (D), who heads a congressional committee that oversees the U.S. Federal Reserve, made a point to say, "A strong response is required – specifically, a meaningful interest-rate cut."
Still, there are others who disagree, and feel as though the August jobs report was something of an anomaly. As U.S. Treasury Secretary Henry Paulson pointed out in an interview with Bloomberg Television, "Data does not always move in a straight line, so occasionally you will find some surprises. The economy will continue to grow in the second half of the year."
His perspective seems to be in the minority, however.