On Friday, investors got a shock when the Labor Department reported a drop in August payrolls, the first monthly decline in four years. The report was seen as evidence that problems with the sluggish housing market and tightening credit have, indeed, become a real threat to growth. Consumer spending accounts for about 70 percent of the economy, and when consumers don't have jobs, they tighten their purse strings and miss their bill payments.
The Dow Jones industrial average ended the week 1.83 percent lower, the Standard & Poor's 500 index fell 1.39 percent, and the Nasdaq composite index dropped 1.18 percent.
This week, investors will be wrestling with predicting the Fed's next move and deciding how drastic that next move should be.
There are worries that Wall Street has already priced in quarter-point rate cut, so even if it gets one, it may not boost stocks. Some investors are angling for a half-point rate cut, or even a rate cut before the Fed's meeting
-- a move that many analysts consider unlikely.
As of Friday, traders who bet on the Fed's next move were not only pricing in a full chance for the central bank to lower rates Sept. 18, but also a full chance of the rate being a full point lower, at 4.25 percent, by December.
But a rate cut, though widely anticipated, is not guaranteed. Bad economic news could cause more jitters for Wall Street this week, but also, any indication that the Fed might keep rates steady will most certainly trigger heavy selling.
The Federal Reserve has said for months that with the economy growing moderately, inflation is its primary concern. Since stocks tumbled in late July, the Fed has lowered the discount rate it charges banks, injected about $320 billion into the banking system through repurchase agreements, and said it is prepared to act as needed to keep the stock market's plunge from damaging the economy. But it has stopped short of announcing a reduction in the benchmark federal funds rate.
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On Monday, several Fed officials
-- Atlanta Fed President Dennis Lockhart, San Francisco Fed President Janet Yellen, Dallas Fed President Richard Fisher and Fed Governor Frederic Mishkin
-- are scheduled to speak at various events around the country. Their comments will undoubtedly be closely parsed by Wall Street for clues about the economy's health and the central bank's upcoming decision.
Investors likewise will be poring over the economic data that will trickle in all week; Tuesday's reading on the U.S. trade deficit will be a particularly closely watched report. But like last week, Friday is the big data day and should help investors gauge how American consumers and businesses are faring and how the Fed might act when it meets next week.
Despite all the negative feelings out there, economists anticipate Friday's data to show that the average U.S. consumer isn't caving under the weight of the slumping housing market. August retail sales are expected to have ticked up 0.2 percent, following July's 0.3 percent increase, and the University of Michigan's preliminary September consumer sentiment reading is forecast to show little change from August.
Analysts also predict that Friday's data will show that businesses kept chugging along late this summer, albeit modestly. Industrial production is predicted to have increased 0.2 percent in August, following a 0.3 percent gain in July, and August capacity utilization is anticipated to register at 82 percent, about the same as in July. Business inventories are expected to have risen 0.3 percent in July after rising 0.4 percent in June.
[Associated Press; by Madlen Read]
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