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September 7, 2001: 5:04 p.m. ET

As the job market weakens, the stock market follows; S&P near 3-year low
By Staff Writer Jake Ulick
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NEW YORK (CNNfn) - One of the broadest U.S. stock market indexes fell to its lowest levels in nearly three years Friday after a report showed that unemployment soared and jobs vanished last month, raising fears that a downturn in consumer spending will erode corporate profits.

The Standard & Poor's 500 index, home to the nation's largest companies, fell to its lowest levels since Oct., 1998, the start of a historic run for stocks that has all but fizzled.

The latest selloff came after the government said more unemployed Americans chased fewer jobs last month, possibly forestalling the profit recovery investors want.

After falling more than 230 points, the Dow Jones industrial average stands near its lowest levels of the year. The Nasdaq composite index declined for a fourth straight day, widening its year-to-date loss to more than 31 percent.

The dollar declined and Treasury bond yields tumbled as investors bet that the weak job market will force the Federal Reserve to cut interest rates yet again next month.

"It certainly increases the risk that the second shoe is going to drop," said Christoph Bianchet, U.S. economist at for Credit Suisse Asset Management, referring to consumer spending. "This bridge is not going to hold and the risks have increased dramatically."

Bianchet, who forecasts a profit recovery by early next year, says the weak numbers make it more likely that the Fed will cut borrowing costs again.

The latest corporate disappointment came from AMR, the parent of American Airlines, which said it will lose money through the rest of the year.

The S&P 500, whose market value accounts for about 75 percent of all U.S. equities, fell 20.62 points, or 1.9 percent, to 1,085.78, its lowest since Oct. 28, 1998, when it ended at 1,068.13.

The S&P fell 4.2 percent on the week and is down 18 percent on the year.

The Dow industrials tumbled 234.99, or 2.4 percent, to 9,605.85, falling 3.5 percent on the week and 11 percent on the year. The Nasdaq composite declined 17.94, or 1 percent, to 1,687.70, widening its weekly losses to 6.5 percent.

More stocks fell than rose. On the New York Stock Exchange, declining stocks topped advancing ones 2,172 to 896 as 1.4 billion shares traded. Nasdaq losers topped winners 2,400 to 1,213 as nearly 1.7 billion shares changed hands.

Pink slips

The economy lost 113,000 jobs last month, the Labor Department said, more than twice the expectations of economists, who forecast that the unemployment rate would to rise to 4.6 percent. Instead, it jumped to 4.9 percent in August, the highest level since 1997.

The weak August job numbers came during a month when Ford Motor Co., Charles Schwab and Corning all cut payrolls to save money amid slowing demand. Motorola this week announced 2,000 layoffs.

"Too many people are losing their jobs," President Bush said from the White House. "The slowdown is real and it's affecting too many lives and we're concerned about it."

With more people out of work, consumer spending, one of the economy's few areas of stability, appears threatened.

Retail stocks fell for a second day, with Wal-Mart Stores (WMT: down $1.15 to $46.22, Research, Estimates) and Home Depot (HD: down $2.60 to $40.95, Research, Estimates) weighing on the Dow industrials. General Motors (GM: down $1.87 to $51.40, Research, Estimates), whose sales are tied to the ups and downs of the economy, also fell.

The Dow's biggest loser, aircraft builder Boeing (BA: down $3.66 to $45.18, Research, Estimates), fell after American Airlines' parent AMR (AMR: down $1.00 to $30.15, Research, Estimates) said it expects to lose money through the end of the year, as the airline faces slowing ticket sales and higher fuel prices.

The job numbers "really don't suggest good things for stocks in the coming weeks, months and quarters," Tom Van Leuven, U.S. equity market strategist at J.P. Morgan Chase, told CNNfn's Before Hours.

Van Leuven likes consumer stables and health care stocks, whose businesses often hold up in a slowing economy.

Still, Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the job numbers – because they offer a backward look at economic conditions – do nothing to change his outlook for recovery.

"Rising unemployment will depress consumers' view of the current economy but tends not to affect expectations much, and that is what drives future spending," he said.

Shares of Intel fell even after the chipmaker said sales in the quarter ending this month will be "slightly below the midpoint" of its July forecast.

Microsoft (MSFT: down $0.62 to $55.40, Research, Estimates) gave back earlier gains, one day after the Justice Department said it would not seek to break the software maker in two in the antitrust case that has been sent back to a federal judge.

eBay (EBAY: down $2.14 to $52.95, Research, Estimates) also fell. The Internet auctioneer filed with U.S. regulators to periodically sell up to $1 billion of common stock.

But shares of Indigo (INDG: up $0.66 to $6.96, Research, Estimates) rose after Hewlett-Packard said it would pay up to $882 million in stock and cash to buy the commercial printer maker. The announcement comes five days after Hewlett-Packard (HWP: up $0.38 to $18.08, Research, Estimates) offered to buy Compaq Computer (CPQ: up $0.24 to $10.59, Research, Estimates)  in a multibillion-dollar stock deal.

For the first time in two decades, General Electric Co. (GE: down $0.84 to $39.66, Research, Estimates) is without CEO Jack Welch. Jeffrey Immelt took over the world's most valuable company Friday from Welch, who has retired.

An inter-meeting cut?

The Federal Reserve next month could cut interest rates for the eighth time this year next month.

But investors have grown frustrated with cheaper borrowing costs, which have yet to spur the business investment that helped fuel the bull market of late 1990s.

It was only 11 months ago that the unemployment bottomed at 3.9 percent. The latest dramatic rise in joblessness, said Tony Crescenzi, bond strategist at Miller, Tabak & Co, "necessitates an immediate rate cut by the Federal Reserve."

That wouldn't be unprecedented. Central bankers twice this year cut interest rates between regular meetings, igniting powerful one-day stock rallies.

"The news coverage on today's jobs data will likely be immense, and this will in a sense pummel the consumer with bad news," said Crescenzi.

But worse news continues to come from the world's second-biggest economy, Japan. The country's economy shrank 0.8 percent in the second quarter, a period when the United States managed a slight gain. graphic

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