The economy sharply deteriorated with the onset of a credit crisis last month, with businesses slashing 159,000 jobs — the most in 5½ years — and California pushed to the point of alerting the U.S. Treasury it may need an emergency loan.
The one promising development as the $700 billion bank bailout bill was signed into law Friday was a feud that broke out between Wells Fargo and Citigroup over who would get to buy troubled bank Wachovia — a sign that the plan has already achieved a principal goal of increasing investor confidence in banks.
The September job cuts were three times the rate seen in previous months this year, signaling that the economy has veered into a significant downturn, a Labor Department report showed Friday. Since the beginning of the year, the economy has lost 760,000 jobs.
"The U.S. economic graph has tilted sharply downwards and recession is no longer in doubt," said Martin Hutchinson, an analyst at Breakingviews.com.
On Wall Street, news of the deteriorating economy and signs that the credit crisis still threatens to take down major victims like California offset elation over the passage of the bailout bill.
With all eyes on the House bailout vote, stocks rose strongly early in the day, with the Dow Jones Industrial Average surging more than 300 points, buoyed in part by Wells Fargo's $15.1 billion bid for Wachovia. That pitted the venerable San Francisco bank against New York giant Citigroup, which seemingly had clinched a deal to acquire Wachovia's banking operations earlier this week in an agreement sanctioned by the Federal Deposit Insurance Corp.
But by the end of trading, stocks lost ground as investors focused on the flagging economy and still-frozen credit markets. The Dow ended down 157 points at 10,325.
The job news was relentlessly gloomy. In September, jobs dropped in every major sector except health, education, mining and government. Even those normally robust sectors experienced weak job growth of 34,000 last month.
The financial industry cut 17,000 jobs as workers were laid off from Wall Street to the West Coast, where two major banks were closed in recent weeks.
The unemployment rate held steady at 6.1 percent, but that was because 121,000 workers — likely discouraged from finding jobs — left the labor force, the department said. The average workweek also declined by 0.1 hour, with the combination of fewer hours and job cuts resulting in a rare decline of 81 cents in average weekly wages to $610.51.
"The U.S. economy has taken a decisive turn for the worst in the last two weeks," said Richard Yamarone, economist with Argus Research Corp., noting that rising inflation is diluting consumer purchasing power, which drives 70 percent of economic growth in the United States.
"With consumer and investor sentiment shattered, a quick pullback in spending and no apparent support from the government, the jobs climate seems locked on quite an undesirable path," Mr. Yamarone said. "We suspect the jobs climate will be worse before it gets better, which means a further deterioration in overall economic conditions — particularly spending."
Meanwhile, California notified the U.S. Treasury that it may need an emergency $7 billion loan within days as shortfalls in revenue have caused the state to be frozen out of the credit markets.
In a letter to Treasury Secretary Henry M. Paulson Jr. released Friday, California Gov. Arnold Schwarzenegger said the credit crunch and recession enveloping the state have left it short of revenue and the cash it needs to float a $7 billion note needed to maintain day-to-day operations.
The governor added that other states also may be unable to obtain financing in the stressed credit markets, which have forced many states and cities to postpone borrowing or pay exorbitant interest rates on bonds and notes they had to issue in recent weeks.
"Like many other states, California is feeling the enormous effects of this crisis on our economy," Mr. Schwarzenegger said in a plea that reportedly helped sway some lawmakers to vote for the bailout package.
"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal Treasury for short-term financing," Mr. Schwarzenegger said.
"This credit crisis has the power to grind the U.S. economy to a halt if swift and decisive action is not taken immediately," the governor continued. "Many states and local governments have been unable to secure financing for bond offerings and for routine cash flow used to make critical payments to schools, local governments and law enforcement."
California, which has suffered major budgetary problems in the wake of the crash of its housing market, is in particularly dire straits, Mr. Schwarzenegger said.
"While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash flow needs exceed the entire budget of some states."
The Treasury had no immediate comment on California's request.
After the bailout bill was passed, Schwarzenegger spokesman Aaron McLear held out hope that credit conditions might improve enough for California to float its own debt and avoid emergency borrowing from the Treasury.