MarketView for September 4

Summary

A dismal day is the only way to describe trading on Wall Street on Thursday as stock prices plummeted and all the key indexes ended the day well into negative territory. The end result was that Wall Street had its steepest decline in more than two months as more signs of weakness in the labor market and increasingly sluggish growth overseas fueled fears over the ability of the economy to stage a recovery any time soon.

News from the nation's largest retailers made it clear that shoppers curtailed their spending last month due to higher gas and food prices and it was not news of that nature that Wall Street wanted to hear.

Only Wal-Mart managed to exceed Street expectations, and it was only able to do so because of its tremendous discounts. The extent of the bad news was evident from the fact that many teen retailers and luxury chains did poorly, a sign that consumers are spending mostly on essentials, and have put their discretionary buying on hold.

Meanwhile, the Labor Department reported on Thursday that new claims for unemployment insurance rose by 15,000 claims from the previous week. That broadly missed expectations for a fourth-straight week of declines; heightening worries that the overall economy has not seen the bottom yet as the consuming public overall will have even less money to spend than was previously the case. Furthermore, if the job market keeps deteriorating, it is tough for Wall Street to see a rebound in sight for the economy's biggest disaster, the mired down housing market.

The market was so disheartened that it showed little reaction when the Institute for Supply Management report indicating that the service sector grew unexpectedly in July for the first time in three months as new orders increased and inflation moderated. The August reading of 50.6 was higher than the 50.0 expected, and the reading of 49.2 in July; but the sector's edging above the threshold between contraction and expansion was hardly a sign of a robust economy.

From Wall Street’s perspective, an economic recovery appears to be far off and with the Dow Jones industrial average down more than 15 percent so far this year, there is not much hope being held out that there will be a significant upturn in stocks anytime soon.

Furthermore, look for the government's labor report on Friday to show a decline of 75,000 jobs in August, which would be the eighth consecutive month of job losses.

The weak outlook for the economy sent the shares of Caterpillar down 5.6 percent to $63.94. Boeing's shares were down 4.6 percent to $63.03 after the plane maker's largest labor union said its members had rejected the company's contract offer and voted to strike.

Shares of Lehman Brothers fell 10.5 percent to $15.17. Lehman's LibertyView hedge funds apparently lost money in July,.

Shares of technology companies, considered vulnerable because of their overseas exposure, were also lower on Thursday. Cisco Systems helped to pull down the S&P 500, with a drop of 4.4 percent to $22.28.

Research In Motion was the biggest loser on the NASDAQ, falling 6.4 percent to $107.49. Shares of Apple were also lower, falling 3.4 percent to $161.22. Ciena slashed its revenue outlook due to phone companies delaying purchases amid a weak economy. Its shares fell 24.9 percent to $13.09.

Productivity Rises

The service sector improved last month and productivity increased during the second quarter but evidence of labor market weakness overshadowed other data the day before a key jobs report. According to Labor Department report released on Thursday, productivity rose at a revised 4.3 percent annual rate, nearly double the 2.2 percent gain previously reported and well ahead of forecasts for a 3.5 percent increase.

Companies have cut payrolls in each of the first seven months this year and an intently awaited report on Friday is expected to show that they did so again in August.

A separate report from the Labor Department confirmed a steadily weakening labor market as the number of U.S. workers filing new claims for jobless benefits jumped by 15,000 last week to a seasonally adjusted 444,000.

That was much higher than the 425,000 claims that analysts surveyed by Reuters had anticipated and helped send major U.S. stock indexes down more than 2 percent. But prices for U.S. Treasury debt extended gains as investors bet the Federal Reserve would keep interest rates low.

The Institute for Supply Management said its non-manufacturing index rose to 50.6 for August from July's 49.5, with a reading above 50 signaling expansion. The ISM report showed inflation pressures in the service sector moderated but the jobs picture also deteriorated.

The report on productivity, which is a gauge of hourly output per worker, showed companies keeping a tight grip on costs by keeping their payrolls lean. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, decreased 0.5 percent in the second quarter.

While higher productivity is encouraging because it keeps inflation in check and could help support business profits at a time of soaring costs, it did reflect tough economic conditions.

The latest figures from the retail sector illustrated the dire straits of many consumers, who confronted job losses even as food and energy prices surged this year.

U.S. discounters, led by Wal-Mart Stores Inc, remained a bright spot in a weak retail industry in August, as shoppers sought back-to-school deals, while department stores and luxury chains disappointed.

In contrast to the strong gain in overall business productivity, the manufacturing sector skidded lower in the second quarter. The decline was concentrated in production of durables goods, including the struggling automobile sector. Manufacturing productivity fell 2.2 percent during the second quarter, the largest quarterly drop in 19 years, after increasing 3.3 percent in the first quarter.

Output by manufacturers fell 3.7 percent, its steepest fall since the final quarter of 2001 after terror attacks led to a steep pullback in production.

Also, overall employment in the goods-producing sector, which includes manufacturing, construction and mining, marked 21 consecutive months of decline in August. This appears consistent with an economy that has been hit by a major decline in home construction and related businesses. However, the unemployment rate probably will keep moving higher as a sluggish economy encourages companies to lay off rather than to hire.

Crude Falls Despite Draw Down

Oil prices fell for a fifth straight session Thursday after a lower-than-expected draw down in gasoline supplies fed beliefs that a cooling economy is curbing fuel demand. Light, sweet crude for October delivery settled down $2.31 per barrel at $107.04. In London, October Brent crude settled down $2.62 per barrel at $105.44 on the ICE Futures exchange.

In its weekly inventory report, the Energy Department said gasoline stocks fell by 1 million barrels to 194.4 million barrels for the week ending Aug. 29. At the pump, a gallon of regular slid less than a penny overnight to a new national average of $3.678, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices have fallen more than 10 percent from the July 17 record average of $4.114 a gallon.

The Department also reported that domestic crude stocks fell unexpectedly last week. Crude supplies dropped by 1.9 million barrels to 303.9 million barrels. Meanwhile, inventories of distillate fuel, which include diesel and heating oil, fell by 400,000 barrels to 131.7 million barrels.

In other Nymex trading, heating oil futures fell 5.78 cents to $3.026 a gallon, while gasoline prices fell 5.48 cents to $2.712 a gallon. Natural gas for October delivery lost 17.9 cents to $7.085 per 1,000 cubic feet.

Energy output in the Gulf of Mexico has begun to slowly come back online after the passage of Gustav. Some oil companies in the western Gulf whose equipment wasn't in the path of the storm began ramping up operations Wednesday. Nonetheless, about 96 percent of oil production in the Gulf and about 92 percent of natural gas output remained shuttered as of Wednesday, according to the U.S. Minerals Management Service, as energy firms assessed platforms, rigs and pipelines and worked to redeploy evacuated workers. The Gulf area is home to a quarter of U.S. oil production and 40 percent of refining capacity.

Ellen Says Economy Faces Subpar Growth

San Francisco Federal Reserve Bank President Janet Yellen said on Thursday that economic growth will be "subpar" in the second half of the year and interest rates must be set at levels that reflect the "substantial headwinds" facing the economy,.

"The slightly negative real (benchmark federal) funds rate does not imply a highly accommodative policy stance," Yellen said.Yellen is not a voting member of the U.S. central bank's policy-setting Federal Open Market Committee in 2008.

"My forecast is for sluggish growth in the second half of this year, with substantial downside risks -- especially emanating from the financial system," she added.