Dow's Friday 250 point plunge on job data reaction suggests we're in a recession

Cruzan · Sep 12, 2007

Let me start by reviewing what happened Friday. The Labor Department reported before the market open that nonfarm payrolls had dropped by about 4,000, far worse than the 115,000 increase that was the consensus expectation of a group of economists that MarketWatch had polled.

The stock market plunged on the news. The Dow Jones Industrial Average dropped some 160 points at the open, on its way to losing 250 points for the session.

[...]

The researchers found that when the economy was in recession - as later determined by the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end - the stock market typically fell when the unemployment news was unexpectedly bad. But when the economy was in an NBER-declared expansion, more often than not the market rallied.

The reason the market reacts differently during recessions than during expansions, according to the researchers: When the economy is growing, the positive effect of a strong jobs report is more than outweighed by the negative effect of the interest-rate increases that such a report makes more probable.

Just the reverse is the case following a weaker-than-expected jobs report. Now the bad news of the jobs report is more than outweighed by the good news that the Fed will have less pressure on it to raise rates.

During recessions, in contrast, interest rate hikes are less of a threat. So a strong jobs report is taken at face value as good news, and a weaker-than-expected report is considered to be bad news.
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Dow's Friday 250 point plunge on job data reaction suggests we're in a recession

Cruzan