Stocks sell off on recession fears after weak jobs report

U.S. stock markets plunged Friday following a weaker-than-expected jobs report that raised fears the economy could be slowing down faster than analysts had been thinking.

The Dow Jones Industrial Average of major U.S. companies had fallen by more than 900 points in Friday morning trading before settling 750 points lower, a loss of 1.9 percent, shortly after noon.

The S&P 500 index was down 2 percent of its value, shedding 141 points, while the technology-focused Nasdaq index was down 2.2 percent.

Equity markets have generally been climbing since the beginning of 2023 on a foundation of strong economic data, as employment levels have continually surpassed expectations in the face of the Federal Reserve interest rate hikes, meant to slow the economy.

Following strong gross domestic product and labor growth earlier this year, a slowdown is now coming into view, suggesting the Fed could be at the end of its tightening cycle.

The Friday jobs report from the Labor Department showed unemployment jumping 0.2 of a percentage point to 4.3 percent in July from 4.1 percent in June — its highest level since October 2021.

The economy added 114,000 jobs in July, well shy of analyst expectations around 175,000.

New payrolls were revised down in the jobs report by 27,000 for June, continuing a trend of downward revisions.

White House chief economist Jared Bernstein said Friday he didn’t see immediate signs of a recession.

“We’re certainly seeing cooling, but I don’t see recessionary signals coming from some of the most important indicators out there,” he said on the CNBC television network Friday, referencing strong second-quarter GDP performance.

“No question, this report came in cooler than expected,” he said, adding that officials “have seen hiring slow.”

Markets widely expect the Fed to start cutting interest rates at its next meeting in September. Interest rates stand at an elevated range of 5.25 percent to 5.5 percent, where the central bank has held them for the last year as economic data has come in hot.

The CME FedWatch prediction algorithm, which is based on the price of futures contracts, put the odds of a 50-basis point rate cut — as opposed to a quarter-point rate cut — in September at nearly 80 percent Friday afternoon.

Interest rate cuts generally precede recession designations, which happened in late 2019, late 2007, and early 2001, as the Fed tries to get ahead of downturns in the business cycle by stimulating the economy with looser borrowing costs.

“Waiting until September [to cut interest rates] unnecessarily increases the risk of a recession,” former New York Federal Reserve Bank President Bill Dudley cautioned in an opinion piece for Bloomberg earlier this month.

Dudley pointed out that the three-month average unemployment rate is up 0.43 percentage points from its recent low point, which is close to triggering a recession signal known as the Sahm rule.

“[It’s] very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a US recession,” he wrote.

Updated at 3:02 p.m.