Crisis overload takes heavy toll

Market Beat

Despite an ever-growing list of crises threatening financial markets and the economy this spring, Wall Street bulls continued to cling to one great hope: U.S. employers were hiring again, and with job growth would come a sustainable economic recovery.

The stock market’s ugly reaction Friday to the disappointing May employment data tells you just how many investors and traders had been hanging on to that life preserver.

With the Dow Jones industrials plummeting 323.31 points to 9,931.97 — below the closing low of 9,974 on May 26, at the nadir of last month’s sell-off — it’s clear that more equity owners just gave up.

It was more than the payroll number driving people to sell. The debt crisis in Europe went from bad to worse, with Hungary warning that it, too, faced a crushing budget deficit and doubts about its ability to pay its lenders. European stocks sank and the euro skidded to a new four-year low against the dollar, falling below $1.20.

But the deepening mess in Europe has been on the radar for months. The payroll number is what really stung because it missed the mark by such a wide margin.

The economy created a net 431,000 new jobs last month, but just 41,000 were from private employers, down from 218,000 in April. Most of last month’s new jobs were temporary census worker positions.

Analysts had expected something on the order of 175,000 new private-sector jobs in May to bolster the idea that the economic recovery had reached the point of liftoff. Wall Street wants to believe that the economy’s animal spirits — the natural tendency to grow — are ready to take over from the government-assisted rebound of the last year.

Instead, the dismal May number on private-sector hiring immediately brought calls for new government help.

The Obama administration and Congress should adopt “a laser-like focus on job creation,” said Komal Sri-Kumar, chief global strategist at money manager TCW Group in L.A. He advises a new program of tax credits for businesses that add to payrolls.

Heather Boushey, senior economist at the Center for American Progress in Washington, called for Congress to pass a proposed bill that would provide $100 billion in federal help to state and local governments to protect existing public-sector jobs and fuel new hiring.

But with the nation already facing a $1.3-trillion budget deficit this year, many Republicans and Democrats have been moving in the opposite direction — seeking to slash spending, including jobless benefits for 1.2 million long-term unemployed Americans whose payments will cease in June without action.

If there’s more Treasury borrowing ahead, the government at least may have a lot more interested buyers lining up for its debt: Treasury bond yields tumbled again Friday as investors rushed to buy the securities as a haven. The world may someday get its fill of Treasuries, but we’re not there yet.

Even as stocks dived Friday, many economists pointed clients to the positives in the May employment report. The number of hours worked, the average work week and average hourly earnings all rose in the month, signs that even if businesses weren’t hiring new workers they had more for current employees to do. That typically is a precursor to expanded hiring.

The underlying trends in hours and income “provide additional evidence of the nation’s continuing economic recovery,” said Joseph Carson, economist at investment firm AllianceBernstein in New York.

Clearly, the economy hasn’t fallen off a cliff. That has been evident in other reports in recent weeks on manufacturing activity, service-sector activity and consumer spending.

Why, then, was private hiring such a bust in May? One potential explanation is that the turmoil in financial markets last month fueled by Europe’s debt woes and other concerns contributed to businesses’ caution about adding employees.

Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi in New York, said he doubted that that was the overriding factor last month. But he conceded that, “In economics, there’s a lot of self-fulfilling prophecy and psychology involved.”

At a minimum, the 11% drop in the Dow index from April 26 to May 26 wouldn’t have been a confidence-builder for executives pondering hiring decisions. Neither, of course, will Friday’s plunge.

What’s more, although there’s always plenty to worry about in this world, the crisis count lately seems to be rocketing off the chart: the Gulf of Mexico oil-spill catastrophe, massive looming state and local budget cuts, the threat of war between North and South Korea, new tensions between Israel and its neighbors, China’s risky attempts to slow its economy, the riots in Thailand, etc.

The risk is that markets and the economy now feed off each other, and not in a good way: Falling markets cause more businesses and consumers to pull back on spending, which weakens the economy, which drives markets lower, which weakens the economy further.

“I think we are in the negative feedback loop,” Sri-Kumar said. He thinks the Dow could fall to 9,000 as more investors decide to head to the sidelines.

Many financial advisors now will counsel patience, naturally. They may remind investors that losses on U.S. stocks still are relatively modest — a 10% to 15% giveback from the market’s April highs, as measured by most broad indexes.

They may also note that when the news is overwhelmingly bad, it’s usually a better time to buy than sell.

The problem lately is just when it seems that nothing else major can go wrong, something does.

The economy and financial system are a long way from the depression-like conditions of late-2008. The U.S. was losing more than 500,000 jobs a month back then. The credit markets were basically frozen.

Investors know that things are a lot better than they were. They just don’t want to go back — and the current crisis overload is making them worry that that’s becoming a bigger possibility.