After ups and downs and mixed economic messages, Wall Street is now retrenching on renewed fears that the US economy is sinking fast and seems likely to enter a recession, analysts say.
The latest data including Friday's grim unemployment report appear to have settled debate about where the economy is headed, dashing hopes for a quick rebound in the United States even as conditions slow in Europe and elsewhere.
"If there was any lingering doubt, yep, it's a recession, and the fourth quarter is shaping up to be an ugly quarter," said economist Scott Anderson at Wells Fargo Economics.
"You could almost hear the bulls on Wall Street throwing themselves on their swords over the past five trading days. The payroll report should end the debate that the economy is doing well." Dina Cover, economist at TD Bank Financial Group said the "dismal US economic data had a disheartening effect on stock markets."
She added: "The eight-month string of job losses reaffirms that US consumers have quite a bumpy road ahead, which does not bode well for economic growth in the coming quarters." In the holiday-shortened week to Friday, the blue chip Dow Jones Industrial Average slumped 2.8 percent to end at 11,220.96. The broad-market Standard & Poor's 500 index lost 3.16 percent to 1,242.31 and the technology-heavy Nasdaq composite retreated a whopping 4.2 percent to 2,255.88.
Over the past week, data showed the US unemployment rate spiked to a five-year high of 6.1 percent in August with 84,000 jobs lost. Auto sales were down sharply from last year's levels, raising fears about consumer spending and the factory sector. These reports dampened hopes for a recovery that had been fuelled by data showing a robust 3.3 percent growth rate in US gross domestic product in the second quarter - a report greeted sceptically by some who said it was distorted by one-time factors.
The latest data on the labour market "confirms that the improvement in GDP growth to 3.3 percent in the second quarter was just a head-fake," said Nigel Gault, economist at Global Insight. "We expect growth to slow in the current quarter to just over 1.0 percent and then turn negative in the fourth quarter."
For the Federal Reserve, which has held rates steady at 2.0 percent while hinting at a rate increase, the payrolls report "confirms that the notion of a rate hike to combat inflation is fanciful - the question now is rather whether the Fed might need to cut again," said Gault. The coming week holds some promise, at least in terms of economic data that may be easier to swallow, according to Gault.
Thursday's report on inflation at the wholesale level is likely to show a decline, reflecting the sharp retreat in energy costs, according to Global Insight economists. This may ease pressure on the Federal Reserve, allowing the central bank to keep interest rates low to stimulate a recovery. Retail sales are expected to show a 0.6 percent rise for the month, led by motor vehicle sales, according to Global Insight. Although car sales were down 15.5 percent from a year ago based on automaker reports, they rose from depressed levels in July, offering some hope for an economic lift.
On Wall Street, "we suspect investors are becoming very nervous as news of the economic slowdown in the important European market continues to surface," said Fred Dickson at DA Davidson & Co. "Investors are also still nervous regarding continuing problems in the mortgage/credit markets ... Technically, the stock market appears oversold, but the near-term trend appears to be down and the next major test will most likely be the July 15 lows for the major market indices."
Bond prices rallied as investors looked for a safe haven. The yield on the 10-year Treasury bond fell to 3.660 percent from 3.813 percent a week earlier, while that on the 30-year bond eased to 4.276 percent against 4.412 percent.
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