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Stock market volatility: Dow jumps on jobs report, plunges, then rises again

Stock market gains early Friday morning were wiped out by noon, before another rally ensued. A better-than-expected jobs report gave some analysts hope that another recession could be averted.

By Ron SchererStaff writer / August 5, 2011

A pedestrian walks past the New York Stock Exchange on early Friday in New York. Stocks around the world tumbled ahead of crucial US jobs figures, continuing a losing streak reminiscent of the aftermath of the collapse of US investment bank Lehman Brothers in 2008.

Jin Lee/AP

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New York

The US economy added more jobs in July than Wall Street economists had expected, giving an early-morning boost to the stock market Friday following the Dow Jones Industrial Average’s 512 point tumble on Thursday.

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But the gain was short-lived. By noon Friday, the Dow appeared to resume its freefall of the day before, dropping more than 220 points – a downward swing of nearly 400 points after gaining 164 points at the opening of trading. Then news that Italy had agreed to fiscal reform – European fears had fueled Thursday's fall – resulted in a sharp rally on Wall Street on a day of extreme volatility.

It could have been worse if the economy had actually lost jobs.

“If the numbers had come in on the soft side, it would have been a very dark day,” says Mark Zandi, chief economist at Moody’s Analytics.com in West Chester, Pa.

Despite the glum financial markets, some economists said the job gains were at least a brighter light for the economy. According to the Department of Labor, the nation added 117,000 jobs last month. The government also revised slightly upward the job gains for May and June.

The relatively modest increase in jobs, however, indicated that the economy is growing slowly.

At the same time as the economy added jobs, the unemployment rate in July dropped to 9.1 percent from 9.2 percent in June. But, the main reason for the slight drop was a reduction in the number of people who say they are looking for work. “It highlights how soft the job market remains,” says Mr. Zandi.

The better-than-expected jobs numbers gave Zandi hope that the US economy would dodge a recession next year.

“The overarching message is that we will skirt a recession,” he says, “unless we get nailed by something off our radar screen.”

However, some other economists think it might be too early to rule out an economic downturn. One of those is Nigel Gault, chief economist at IHS Global Insight in Lexington, Mass. who raised his probability of a recession from 33 percent to 40 percent on Friday.

“The economy is running pretty close to stall speed,” he explains. “When you are that weak, you run the risk of a downward spiral of confidence and activity. It does not take much of a shock to go from stall speed to outright recession.”

Although Mr. Gault says it was a relief to get a better jobs report in July, he thinks the August numbers are likely to be worse since they will reflect the uncertainty that built up during the debate over raising the debt ceiling.

“I would be surprised if we sustain the uptrend,” says Gault.

In Washington, the White House reaction was somewhat predictable. In a statement on Friday, Austan Goolsbee, chairman of the Council of Economic Advisors, called for bipartisan action in a number of areas such as extending the payroll tax cut, which expires this year, and extending unemployment insurance benefits.

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