Recession worries deck stocks

NEW YORK (CNNMoney.com) -- A weaker-than-expected December jobs report sent stocks tumbling at midday Friday, exacerbating worries that the economy may be falling into recession.

The Dow Jones industrial average (INDU) tumbled 1.1 percent over 2-1/2 hours into the session. The broader S&P 500 (INX) index lost around 1.3 percent. The Nasdaq (COMPX) composite lost 2.3 percent. The Russell 2000 (RUT.X) small-cap index fell 1.9 percent.

Employers added 18,000 jobs to their payrolls last month, short of forecasts for 70,000 and down from a revised 115,000 in the previous month.

The unemployment rate, generated by a separate survey, rose to 5 percent - a more than two-year low - from 4.7 percent in the previous month. Economists thought it would rise to 4.8 percent.

Average hourly earnings, the report's inflation component, rose 0.4 percent after rising a revised 0.4 percent in the previous month. Economists thought wages would rise 0.3 percent.

Stocks have been volatile for months as investors have mulled the fallout from the housing and credit market crises, and whether the economy is heading into recession.

A weakening labor market added to fears about the economic outlook.

"In September, October and November we saw pretty solid payroll numbers, indicating that although the economy was in a bit of a slowdown, the jobs market was holding up, giving us some sort of floor," said Georges Yared, chief investment strategist at Yared Investment Research. "That floor was pulled out from under us this morning."

In the next few months, investors will be looking to see if the employment report was a temporary indication or the start of a longer-term downtrend for the labor market.

Investors will also be looking to see how this report impacts Federal Reserve policy, with bets now rising that the central bank may need to cut rates more aggressively, perhaps at the next meeting on Jan. 29 and 30. (Full story)

The Federal Reserve announced Friday that it will lend up to $60 billion this month to banks as a means of easing the credit crunch.

Treasury prices climbed, as investors sought safety in the comparably less risky government debt. The rise lowered the yield on the 10-year note to 3.84 percent from 3.89 percent late Thursday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the yen and the euro.

U.S. light crude oil for February fell $1.59 to $97.59 a barrel on the New York Mercantile Exchange, after hitting a record trading high above $100 a barrel during Thursday's session.

COMEX gold for February delivery fell $8.60 to $860.50 an ounce, pulling back from an all-time high hit Wednesday.

Stock declines were broad based, with 26 out of 30 Dow components falling, led by tech stocks such as Intel (INTC, Fortune 500) and IBM (IBM, Fortune 500) and financial companies such as Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than three to one on volume of 680 million shares. On the Nasdaq, decliners beat advancers three to one as 1.14 billion shares changed hands.

In other economic news, the Institute for Supply Management's reading on the services sector showed a smaller monthly decline than economists had been expecting. (Full story).

Wall Street also considered the results from Thursday's Iowa caucuses, which kicked off the 2008 presidential election. Former Arkansas Gov. Mike Huckabee won on the Republican side and Sen. Barack Obama of Illinois won for the Democrats.

Stocks were mixed Thursday as a jump in factory orders helped temper concerns about inflation as oil and gold prices hit record highs.