Dow plunges nearly 1,000 points after report shows sharp drop in U.S. hiring (2024)

Fear, long absent in financial markets as investors bet on a "soft landing" for the U.S. economy, is back in the air on Wall Street.

Stocks tumbled Friday after new government data showed a steep decline in hiring in July, spurring concerns that economic activity is slowing faster than economists expected.

The blue-chip Dow Jones Industrial Average plunged more than 980 points, or 2.4%, in early trade before paring its losses to close down 611 points, or 1.5%, at 39,737.

The broader S&P 500 sank 1.8% on the day, while the Nasdaq Composite slid 2.4%, fueled by disappointing quarterly earnings from bellwethers such as Amazon, Intel and Tesla. That dropped the tech-heavy index into "correction" territory, or when stocks slide at least 10% from their previous high.

Market analyst Adam Crisafulli of Vital Knowledge said the weak employment numbers will heighten fears the economy is losing steam. "This labor report fell short on pretty much every single metric," he said in a note to investors.

Employers added only 114,000 jobs in July, while the U.S. jobless rate rose to 4.3%, the highest level since unemployment reached 4.5% in October of 2021, according to the Department of Labor. The payroll gains last month undershot analyst forecasts of 175,000 jobs.

Too little, too late?

Although stocks have hit record highs this year, propelled in part by excitement over artificial intelligence companies, investors have pulled back in recent weeks as signals piled up that economic activity was cooling.

Such a slowdown is largely by design, with the Federal Reserve determined to extinguish inflation by keeping interest rates steady before easing back on the throttle. The central bank on Wednesday said it was leaving the federal funds rate — what banks charge each other for overnight loans — unchanged, although Chair Jerome Powell suggested that policy makers were teeing up a cut in September.

But some analysts think the Fed has waited too long, raising the risk of a hard landing for the economy, or even a recession.

"The Fed is seizing defeat from the jaws of victory," said Brian Jacobsen, chief economist at Annex Wealth Management. "Economic momentum has slowed so much that a rate cut in September will be too little and too late."

Economists said signs that the job market is faltering makes it all but certain that the Fed will lower its benchmark rate in September in a move to ease borrowing costs and keep the economy from stalling. The central bank could cut by as much as 0.5 percentage points, or even look to dial back rates before its next policy meeting on September 17-18, according to investment advisory firm Capital Economics.

Citing the weakening labor market, Goldman Sachs analysts are now penciling in three quarter-point cuts by year-end, starting in September.

Economy remains solid

Despite the downshift in hiring, some analysts noted that the overall economy remains strong, pointing to an ongoing decline in inflation, healthy consumer spending and solid wage growth. And while the nation's unemployment rate has risen to 4.3%, up from 3.7% in January, that is largely because more people are looking for work rather than a spike in layoffs.

"People returning to the labor force is less threatening than layoffs, reducing the risk that a vicious cycle sets in of rising unemployment that leads to income loss that leads to more job losses," Ryan Sweet, chief U.S. economist at Oxford Economics, said in a research note.

Until mid-July, U.S. stocks had enjoyed a run of more than 350 straight trading sessions without a drop of more than 2%, the longest stretch in 17 years, according to investment bank UBS.

And while the S&P 500 is down roughly 6% from its peak in July, Sweet noted that drops in equity prices of 5% or more have occurred at least once a year for the past four decades. Market corrections, or a drop of at least 10%, occur an average of every one and half to two years, according to Oxford.

"Equities selling off should be seen as a normal reaction, especially considering the high valuations in many pockets of the market," Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson Investors, said of the July job numbers. "It's a good reminder for investors to focus on the earnings of companies going forward."

—The Associated Press contributed to this report.

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