Markets 'strong' despite slowing economy - Bush

President is upbeat about the economy after meeting with financial advisors.

January 4 2008: 2:50 PM EST

WASHINGTON (AP) -- President Bush said Friday that while there is some uncertainty about slowing economic growth, the nation's "financial markets are strong and solid."

Bush spoke after getting an update from his top economic advisers, who are helping him decide whether to offer a package to stimulate the U.S. economy as it weathers the housing slump, rising oil prices and an uptick in unemployment.

"This economy of ours is on a solid foundation, but we can't take economic growth for granted," Bush said. "And there are signs that will cause us to be ever more diligent and make sure that good policies come out of Washington."

Sitting around a table with his economic advisers in the Roosevelt Room, the president warned Congress against taking steps that would increase taxes. "If the foundation is strong yet indicators are mixed, the worst thing that Congress can do is raise taxes on the American people and on American businesses," Bush said.

Bush met with the advisers - his first with them as a group - the same day that the Labor Department reported that hiring practically stalled in December, driving the nation's jobless rate up to a two-year high of 5 percent. The report, which fanned fears of a recession, indicated that employment conditions are deteriorating, strained by the housing crisis and credit crunch that are sapping economic strength. On Wall Street, stocks tumbled.

"While there is some uncertainty, the report is that the financial markets are strong and solid," Bush said.

He described the nation's economic indicators as mixed.

He said there have been 52 straight months of job creation, but job growth slowed last month; core inflation is low, but U.S. consumers are paying more for gasoline and for food; and consumer spending is strong, yet the values of many U.S. homes are on the decline.

"For those of you who are paying more and are worried about your home, we understand that," Bush said. "That's why we have an aggressive policy to help creditworthy people stay in their homes."

He urged Congress to pass legislation to help homeowners refinance. Bush also called for expanding petroleum refining capacity and exploring for energy in "environmentally friendly ways."

"We have got to understand that if we are worried about gasoline prices, we ought to expand refineries here in the United States, and we ought to explore for oil and gas in environmentally friendly ways in the United States," he said.

The White House is not ready to say if Bush will offer a stimulus package - possibly coinciding with his State of the Union address on Jan. 28.

Deputy press secretary Tony Fratto said before the meeting that the president and his advisers are looking at ways to keep the economy open for foreign investments, open up markets for U.S. exporters, and fight against efforts to raise taxes. They are also looking at shorter-term threats to economic growth, including the downturn in the housing market. Tax cuts are among the things being considered for a possible stimulus package, he said.

"We're not ready to say whether we will, in fact, have something or not, at this point," Fratto said. "We need a little bit more information. There are lots of ideas out there. Obviously tax policy is an important component, but we'll see. We want to take in more data."

Vice President Dick Cheney and other White House officials joined Bush in his meeting with his working group on financial markets, an interagency panel led by Treasury Secretary Henry Paulson that meets regularly to discuss market conditions and regulatory policy. Others around the table included: Federal Reserve Chairman Ben Bernanke; Chris Cox, chairman of the Securities and Exchange Commission; Walt Lukken, acting director of the Commodity Futures Trading Commission; Ed Lazear, chairman of the president's Council of Economic Advisers; and Treasury Undersecretary Robert Steel.

On Monday in Illinois, Bush is expected to give a "status check" on the economy at the Union League Club of Chicago. The president, however, is not expected to tip his hand about what he might propose to reinforce the economy.

The December employment picture was much weaker than economists were expecting. They were forecasting the unemployment rate to bump up to 4.8 percent, not 5 percent. 

Pressure mounting for big rate cut

European Central Bank ready to intervene against inflation: Trichet

LONDON (AFP) - - The future of ailing British bank Northern Rock -- including possible nationalisation -- is to be decided in the next six weeks, finance minister Alistair Darling said in an interview out Saturday.

We want the bank to come back before the middle of February," the Chancellor of the Exchequer told the Financial Times amid growing speculation that no private bidder will be able to raise the capital to buy out the bank.

Northern Rock, hit by the squeeze on the global credit markets after the US subprime mortgage sector crisis, was forced to apply for emergency funding from Britain's central bank the Bank of England in September.

That prompted thousands of worried investors to queue at branches of the mortgage lender to withdraw their savings, with a subsequent knock-on effect on consumer confidence in the banking sector.

Northern Rock -- propped up by at least 25 billion pounds (33 billion euros, 49 billion dollars) of taxpayers' money -- is talking to two potential bidders: Richard Branson's Virgin Group and the private equity firm Olivant.

But the process is dragging on, as the bidders struggle to find financial backing to reimburse part of the money borrowed from the Bank of England.

Prime Minister Gordon Brown told his monthly news conference in December that the government's preferred option was a private sale but did not rule out nationalisation, saying "all options were on the table".

In a sign Darling wants to force the pace, he said a decision would be made soon after US investment bank Goldman Sachs, which was brought in by the government to see if a private purchase was viable, reports in mid-January.

The chancellor unveiled proposals Friday to give Britain's financial watchdog more powers to intervene in failing banks to avoid a repeat of the crisis, after accusations that intervention was not swift enough.

Motorola heads to CES with dull Razr

The cell phone manufacturer has struggled as new phones from rivals and big price cuts for the Razr have eaten into sales and profits.

CHICAGO (AP) -- New Motorola Inc. CEO Greg Brown doesn't have the secret weapon his predecessor Ed Zander possessed when he arrived at the cell phone maker four years ago -- the Razr.

But that could be a good thing -- if Brown, who took over Tuesday as chief executive, applies lessons learned from Motorola's (MOT, Fortune 500) nasty fall last year.

The then-up-and-coming Razr ultimately proved Zander's undoing. It propelled the Schaumburg, Ill.-based company to lofty sales levels it couldn't sustain without cutting prices aggressively, a decision that had harsh consequences.

The once-soaring company is now thought to have only broken even for 2007. It pulled back from some developing markets and cut 7,500 jobs last year, creating a leaner company that analysts say has halted its free fall in market share and profitability, and laid the groundwork for a promised turnaround.

"People might think Motorola's out of the game entirely," said Neil Strother, a wireless analyst in Seattle for Jupiter Research. "They're not out of the game, they've just had a few bad quarters."

The Razr remains a solid seller, but rivals' newer phones have taken away its buzz. And Brown, 47, who was promoted from chief operating officer and earlier ran San Francisco-based software company Micromuse (MUSE), doesn't appear to have a killer product to unveil at the Consumer Electronics Show that opens Monday in Las Vegas.

Such a blockbuster announcement from Motorola is likelier at the big wireless shows -- in Barcelona in February or Las Vegas in April. But nothing the company is known to have in the pipeline seems likely to match the Razr's popularity.

The company's shares fell 6 percent Friday after Citibank analyst Jim Suva issued a downgrade, saying its "lack of compelling new products" likely means its Christmas selling season was not strong. The stock dipped as low as $14.89, within 2 cents of a three-year low, before closing at $15.07.

While putting its financial and operational house back in order, Motorola must regain ground lost to industry leader Nokia Corp. (NOK) and Samsung Electronics Co., which overtook Motorola as the No. 2 cell phone manufacturer last year.

Serious business at Motorola

"The challenges for Greg Brown are very similar to those that were faced by Ed Zander: to work on innovation and new products," said Hugues de la Vergne, principal analyst with market research firm Gartner Inc. in Stamford, Conn. "A more steady stream of innovative new products from the likes of Samsung and Nokia have allowed them to build nice market-share gains at Motorola's expense."

The company's share of the global market for mobile devices collapsed from 23 percent at the end of 2006 to 13 percent within six months and hasn't moved significantly since. Mobile devices account for two-thirds of Motorola's sales.

Motorola "milked the Razr phone cow for too long," said Morningstar analyst Jordan Zounis, and it's still paying the price. Zounis sees strength in the company's mid-price products, including its revamped Razr line and new multimedia phones, but weakness on both the high end -- with only the Motorola Q smart phone -- and low end.

That could mean Brown has to produce another hit soon.

Stockholders may have been temporarily placated by the company's shake-up but remain displeased by the 43 percent drop in the stock's value from its six-year high of $26.30 in October 2006.

Carl Icahn, the billionaire financier who lost a bid in May for a board seat from which he wanted to force some changes, hailed Zander's resignation in November but said then that Motorola still has "major problems."

"Brown has about nine months to show the new and improved Motorola," Zounis said Wednesday. "Otherwise, I think the callings of individuals such as Carl Icahn will perhaps have a little bit more weight next time around."

Brown is likely to be judged negatively unless he can improve results from its trademark handset business -- even if Motorola's emergency radios, TV set-top boxes, wireless network equipment and other lines show strength.

"If Motorola stays with the same portfolio of handsets they're going to have trouble, because the market is evolving," said Standard & Poor's analyst Todd Rosenbluth. 

How Bush may boost the economy

Any short-term push to stave off a recession could face political and budgetary challenges.By Jeanne Sahadi, CNNMoney.com senior writerJanuary 4 2008: 4:52 PM ES

NEW YORK (CNNMoney.com) -- Word is that President Bush may propose new measures to boost the economy by the time he gives his State of the Union address later this month.

While he has steadfastly maintained that the economy is fundamentally strong, the fact that the president is considering a so-called fiscal stimulus package is an indication that the Administration is getting worried.

Such a package would aim to ward off a recession, the fear of which has grown stronger in the wake of discouraging data on jobs, rising energy prices and a slowing housing market.

There is also an indication that leading Democrats might be working on a plan of their own. A spokesman for Senate Finance Committee Chairman Max Baucus (D-Mont.) said in an e-mail to CNNMoney.com that Sen. Baucus "already has ideas of his own about the possible need for an economic stimulus package this year and is planning for the Finance Committee to discuss very early in the session what shape such a package might take."

Tax cuts on the table

It's not clear what measures the White House is considering, but it is widely believed that tax cuts are among them. In that realm, there are a number of options the president could propose, but all of them carry political costs, economic costs or both.

One option that economist Mark Zandi of Economy.com thinks might help is a temporary tax cut, much like the $300 tax rebate Americans got in the wake of Sept. 11. "It was well-timed and was significant for lower and lower middle-income households," Zandi said, although he acknowledged that not all economists agree about how successful the rebate was.

But a new rebate will likely draw criticism. In 2001, the government had the advantage of a budget surplus. Now it's operating with a deficit, which could raise concerns about the cost of a rebate. "Where's the money going to come from? [A rebate will] take it from some other place in the economy," said Chris Edwards, director of tax policy studies at the libertarian Cato Institute, which advocates for limited government and free markets.

Zandi thinks it might also make sense to make President Bush's income tax cuts for the middle class permanent, a move that leading Democratic presidential candidates have indicated they'd support. Where they part company with the president, however, is in making those tax cuts permanent for high-income households, too. So if the president did push for an extension of his tax cuts for the middle class, that could undercut his stated goal of making his tax cuts permanent for everyone, Zandi said.

Zandi would also advocate making the lower rates on capital gains and dividends permanent for everyone. Despite his belief that the federal government should not try to control the short-term performance of the economy, Edwards agrees that such a move could help stabilize the markets by giving investors more certainty about their investment tax bill. It also would reduce any pressure investors might feel to sell their holdings before the investment rate cuts expire.

But the cost of making any of the Bush tax cuts permanent is a sore point for fiscal watchdogs, who contend such cuts are unaffordable in the long term, given the growing budgetary demands of Social Security and Medicare as well as the war in Iraq.

Of course, with any tax-based stimulus, the potential benefit of its short-term effect has to be weighed against its long-term cost, said Clint Stretch, a federal tax policy expert at Deloitte Touche. "[You must consider the net benefit] if you have to turn around to the credit markets and borrow the money to pay for it."

Non-tax options

President Bush could also call for measures intended to stimulate the housing market, Zandi said.

Bush has already said Congress should act quickly to pass a number of housing-related legislative proposals that he supports. One key measure would reform the Federal Housing Administration (FHA), which would make the relatively low cost FHA-insured mortgages more readily available to consumers who want to buy homes and to those who want to refinance out of unaffordable subprime loans.

The White House also might consider calling for a temporary increase in the size of mortgages that Fannie Mae (FNM) and Freddie Mac can purchase from mortgage lenders. These two government-sponsored enterprises guarantee the purchase and trading of so-called "conforming" loans, which are those valued at $417,000 or less. Any loans above that amount are considered "jumbo" loans.

An increase in the conforming loan limit would make it easier and less costly for borrowers in high-cost areas to get loans because Fannie and Freddie would guarantee their purchase by investors.

In the past, the Administration has said it would support a temporary increase in loan limits, but only if lawmakers pass legislation that would boost oversight of both Fannie and Freddie, which have been plagued by accounting scandals. 

Citigroup stock: Cheap chic

Stock Spotlight: The banking giant was one of the worst performers of the Dow last year. But with more trouble lurking, is it worth buying the stock?

NEW YORK (CNNMoney.com) -- Of all the investment tales that have unfolded as the mortgage crisis swept through Wall Street, none has been more engrossing than that of Citigroup.

The financial services giant has shaken up its top management, sold a $7.5 billion stake in the company to a Middle Eastern state investment fund and watched its stock tank - all within the last two months.

Citigroup (C, Fortune 500)'s stock endured one of its worst annual performances on record last year and was the worst performing Dow component in 2007. Its shares finished the year down 47 percent.

But with the stock now trading just below $30 a share, some analysts have argued that the traditionally blue-chip Citi looks pretty attractive right now for long-term investors - given the company's earnings potential and its global presence at a time when overseas economies are enjoying robust growth.

"To me it does look a bit cheap given its international exposure and the growth there," said Adam Compton, head of U.S. financials research at RCM Capital Management in San Francisco.

So is Citigroup stock worth the gamble?

Maybe not. The company is widely expected to post a loss for the fourth quarter on Jan. 15, as well as take another staggering writedown. And there are concerns that newly appointed CEO Vikram Pandit, with his limited experience, won't be able to revive the ailing firm.

Leading the Citi charge

It's unlikely that many Citigroup shareholders shed any tears when former Chairman and CEO Charles Prince stepped down in November amid the company's multi-billion dollar losses on bad mortgage bets.

But the appointment of Pandit to the position of CEO and Sir Win Bischoff as company chairman hasn't exactly soothed Wall Street either, with critics pointing at the new management's lack of experience at running a firm as large and diverse as Citigroup.

"Other than the new CFO, it is unclear as to why any of these people have their positions since none have demonstrated the skill set necessary to function in these positions," Punk, Ziegel & Co. analyst Richard Bove, who rates the stock a "buy," wrote in a research note published earlier this week.

So far, however, Pandit, a former Morgan Stanley (MS, Fortune 500) executive, has shown some courage. Last month, he moved $49 billion in assets from Citigroup's seven troubled structured investment vehicles, or SIVs, onto the company's balance sheet in order to protect their credit ratings and give them time to sell their assets.

Some analysts believe that given his position as a newly installed CEO, Pandit has some leeway to make other, much-needed changes at Citigroup, such as selling some of the company's non-critical assets and slashing the company's bloated payroll on top of the 17,000 job cuts announced last April.

"You would want to make those changes at a time when you were not judged as harshly," said Kris Niswander, banking analyst and associate director at research firm SNL Financial.

Credits and losses

What appears unavoidable for Pandit and the company, however, is a fourth-quarter loss - and most likely another humiliating writedown related to Citigroup's exposure to mortgage-linked securities.

In early November, the company warned it would write down as much as $11 billion when it reports results Jan. 15 because of its exposure to the subprime mortgage market.

But some analysts have warned that number could grow because of tough credit market conditions during the period. Last week, Goldman Sachs analyst William Tanona estimated that Citi could take a $18.7 billion hit in the fourth quarter.

Such a loss could prompt some interest in Citigroup among investors who have been waiting for the firm to finally hit rock bottom. But what also ails Citi is the company's capital constraints, or a lack of available funds to absorb losses.

Abu Dhabi's state investment fund bought a stake of Citi in November in exchange for a $7.5 billion cash infusion. Analysts such as Tanona and CIBC World Markets' Meredith Whitney have argued recently that Citi still needs to take additional action to raise capital, including cutting the company's attractive dividend.

"That would be a concern as an investor, but there is a good possibility they might need to cut it," said Rose Grant, a managing director at Eastern Investment Advisors who is bearish on Citigroup stock even though her firm owns shares of the company.

Forget the bad, buy the stock

It's undeniable that the road ahead for Citigroup is fraught with plenty of obstacles, with few indications that the company will recover any time soon.

But buried underneath all this negative news is an awfully attractive stock that has not traded at these levels in about 5 years.

The consensus on Wall Street is that given its recent swoon, Citigroup shares have become much more attractive lately. According to Thomson First Call, 15 of the 19 analysts following the company have either a "buy" or "hold" rating on the stock.

The consensus 12-month price target is $38.13, about 34 percent higher than its current price of just under $29 a share.

Based on a price-to-book-value ratio - a measure of assets minus liabilities that analysts prefer for comparing financial stocks because of the earnings volatility in the sector - Citigroup is a pretty attractive value compared to its peers.

Citi trades at about 1.1 times book value. That's cheaper than rival JPMorgan Chase (JPM, Fortune 500), which trades at a multiple of 1.2, and Bank of America (BAC, Fortune 500), which trades at a multiple of 1.3. Even embattled Merrill Lynch (MER, Fortune 500) trades at a multiple of 1.3.

Granted Citigroup stock may not be quite the bargain for those investors looking to enjoy a tidy dividend, and there could be some short-term pressure on the stock given the uncertainty surround the fate of the company in the months ahead.

But with a CEO in place who is showing early signs that he is bold enough to save the firm, and impressive earnings potential across the company's domestic and international divisions, long-term investors can be sure that opportunities to snap up Citi stock at these prices are not likely to be around for too much longer.

"Citigroup has a tremendous amount of brand strength and earnings power," said Niswander. "It is a strong company." 

NEW YORK (AFP) - - Oil prices slipped Friday after a shockingly weak US employment report fanned worries about recession and demand in the world's biggest energy consumer

New York's main contract, light sweet crude for delivery in February, dropped 1.27 dollars to close at 97.91 dollars a barrel.

In London, Brent North Sea crude for February shed 81 cents to settle at 96.79 dollars

A lackluster US jobs data triggered profit taking a day after oil prices briefly struck intraday record highs.

On Thursday, the benchmark New York contract hit 100.09 dollars and Brent touched 98.50 dollars.

The US Labor Department reported the US economy gained 18,000 nonfarm jobs in December, the slowest job creation since 2003, as the unemployment rate rose to 5.0 percent, more than a two-year high.

The reading toppled market expectations of a 70,000 jobs increase and a 4.8 percent jobless rate, up from 4.7 percent in November.

The surprisingly weak report was a fresh warning flag of a slowing economy and prompted speculation that the Federal Reserve would lower interest rates again, after a combined one percentage point reduction since September.

"There should be every reason to think that the poor jobs number will return the focus to the economic slowing theme," said John Kilduff of MF Global.

"While the bull run in the energy markets may have a last gasp or two, the report will underscore the trouble on the economic front."

Despite the pullback Friday, some analysts said oil prices remained well supported and could soon strike new all-time peaks.

Sucden analyst Andrey Kryuchenkov noted a "favorable" combination of declining inventories, a weak dollar, soaring oil demand from Asia and geopolitical risks had helped to propel crude prices to 100 dollars.

"It seems that these factors will continue to dominate oil headlines in the foreseeable future. And even if we see a deeper correction in oil prices, in the longer term, the bullish trend is likely to prevail, as spare capacity on the supply side is very limited and demand is still growing," he added.

Thursday's declines were largely fueled by a US government showing American crude inventories had fallen by 4.0 million barrels last week, stoking supply concerns.

It was the seventh week in a row that stockpiles had dropped.

For Phil Flynn at Alaron Trading, the oil rally is being driven by "a kind of bullish inevitability in the press."

"What is clear based on yesterday's report is that oil needs a piece of news to drive us through 100 dollars a barrel or that new money that expects instant gratification will have to cover" when prices do not go much higher, he said.

Meanwhile the oil-producing cartel OPEC was expected to face fierce pressure to help calm the market at a special meeting on February 1.

The 13-member Organization of the Petroleum Exporting Countries shrugged off demands at its last meeting in December, despite a public plea from US Energy Secretary Samuel Bodman for an output increase.

The Saudi-led cartel pumps about 40 percent of world oil supplies but restricts the output of its members through a quota system that is regularly reviewed.

Pressure mounting for big rate cut

An uptick in the unemployment rate has Wall Street calling for the Fed to lower rates by a half-point.

Weak job growth fuels US recession fears

WASHINGTON (AFP) - - The US economy succumbed to housing and credit troubles in December as just 18,000 jobs were added and the unemployment rate rose to 5.0 percent, data showed Friday, highlighting fears of recession.

Private-sector employment shrank in the month for the first time since 2003, with the report barely positive on a gain in government jobs, according to the Labor Department's nonfarm payrolls report.

The survey, seen as one of the best indicators of economic momentum, showed a sharp decrease from November, which had job gains of 115,000, revised up from an initial estimate of 94,000.

The overall unemployment rate rose from 4.7 percent in November.

The report showed the smallest number of jobs created since August 2003 and the highest unemployment rate since November 2005, in the wake of Hurricane Katrina. Analysts had expected on average a gain of 70,000 jobs and a jobless rate of 4.8 percent.

The report is the "strongest evidence so far that the economic expansion is grinding to a halt," said Peter Morici, an economist at the University of Maryland.

"The Federal Reserve will aggressively cut interest rates to combat the US slowdown. However, these efforts may prove insufficient to head off a difficult recession."

The report came amid an intense debate among analysts on whether the US economy was headed for recession as a result of the meltdown in housing and its impact on the finance sector, which has led to a credit squeeze.

"This does suggest things are weak," said Scott Brown, chief economist at brokerage firm Raymond James.

Brown said the report suggests a slowdown in economic growth to around 1.0 to 1.5 percent in the fourth quarter but not yet a contraction.

"You're still looking at positive job growth overall. You're getting closer to a recession (but) I still think we'll see better growth" in the coming months.

Brown said the weakness "is concentrated in manufacturing and construction and it's still a question as to whether the housing weakness will drag the overall economy down."

Robert Brusca at FAO Economics said the decline in private-sector jobs is especially troubling.

Brusca said the Fed, which has already cut short-term rates by a full percentage point since September, may have to do more to stimulate a flagging economy.

"Look for more aggressive Fed rate cuts," he said.

"When unemployment rises by more than 0.5 percentage points from its cycle low a recession generally ensues. The economy has now performed that trick."

Stephen Gallagher, economist at Societe Generale in New York, said the report ends a streak of relatively healthy job growth that had cushioned the economy against the impact of credit and housing troubles.

Gallagher said the economy could be headed for trouble if the problems in several sectors dent consumer spending, which accounts for two-thirds of gross domestic product.

"Up to this report, employment gains have been seen as sufficient to support the consumer," Gallagher said. "This report raises threats."

December's gain was far below the 111,000 average monthly rise in 2007 and just a fraction of the more than 100,000 estimate of the number of new jobs the economy needs to keep up with new entrants to the workforce.

Service sector jobs increased 93,000 jobs, while government jobs increased by 31,000.

But these gains were offset by steep losses in the goods producing sectors. Construction employment declined by 49,000, while factory jobs fell 31,000.

While the overall service sector gained jobs, the retail sector fell by 24,300.

Average hourly wages rose 0.4 percent in December to 17.71 dollars, suggesting wage-based inflation pressures remain. Average hourly earnings have increased 3.7 percent in 2007.

Brutal selloff on Wall Street

Dow tumbles over 250 points after weaker-than-expected jobs report revives recession worries. The Nasdaq plunges.

NEW YORK (CNNMoney.com) -- Stocks tanked Friday, with the Dow shedding over 250 points, after a weaker-than-expected December jobs report exacerbated recession fears.

The Dow Jones industrial average (INDU) tumbled almost 2 percent. The broader S&P 500 (INX) index lost around 2.5 percent. The Russell 2000 (RUT.X) small-cap index fell 3.2 percent.

The Nasdaq (COMPX) composite lost 3.8 percent, or just over 98 points. According to Stock Trader's Almanac, it was the tech-heavy index's biggest one-day point loss since Sept. 17, 2001, the first day the market reopened for trading after having been closed in the aftermath of 9/11. On that day, the Nasdaq lost 115.83 points.

A weaker-than-expected unemployment rate sparked a big stock selloff. Bonds rallied, as investors sought safety and the dollar fell versus other major currencies. Oil and gold prices retreated from recent records.

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 18,000 figure marked the weakest monthly jobs growth since August 2003. (Full story).

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 worried that the economy could be heading into recession.

The weak labor market report amplified those worries.

"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 December employment report was a temporary indication or the start of a longer-term downtrend for the labor market.

"Jobs growth in the month was moribund and we should expect it to be moribund for a while," said Brett Hammond, chief investment strategist at TIAA-CREF. "But I think we shouldn't get too overwhelmed by the notion of a recession yet."

He said that economic growth prospects look to pick up in the second half of the year, and that by that point the housing issues will be "through the trough," although the woes for that sector won't be over yet.

In the short-term, investors will be looking to see how the Dec. jobs report impacts near-term Federal Reserve policy, with bets now rising that the central bank could 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 through its new auction process 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 $1.27 to settle at $97.91 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 $3.40 to settle at $869.10 an ounce, pulling back from an all-time high hit Wednesday.

Jobs weak, unemployment soars

Stock declines were broad based, with 29 out of 30 Dow components falling, led by tech stocks such as Intel (INTC, Fortune 500), IBM (IBM, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) and financial companies such as Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Intel's decline followed a JP Morgan downgrade to "neutral" from "overweight." Separately, the chipmaker said it is pulling out of the One Laptop Per Child program.

Intel also trades on the Nasdaq and was among the 96 components of the Nasdaq 100 that fell on the session.

A slew of retail stocks fell on concerns that weaker job growth will slam consumer spending. The S&P Retail index lost nearly 4 percent.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than three to one on volume of 1.26 billion shares. On the Nasdaq, decliners beat advancers four to one as 2.07 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.