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US credit rating downgraded

Plan to cut nation’s debt falls short, S&P says; reduction - a first - eclipses upbeat jobs report

By Todd Wallack
Globe Staff / August 6, 2011

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A major rating agency last night downgraded the nation’s credit for the first time in history, after a wild day on Wall Street that saw stocks swing from triple-digit gains to triple-digit losses and back into positive territory as investors weighed the strongest US job gains in months against debt problems here and in Europe.

The downgrade could, over the long term, raise borrowing costs for the US government, as well as for consumers and businesses. Standard & Poor’s said it lowered the nation’s credit rating to AA+ from AAA because political leaders have yet to develop a credible plan to reduce the nation’s $14 trillion debt, despite the recent deal to raise the debt ceiling and cut spending.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,’’ S&P said in a statement yesterday.

The downgrade, which came after stock markets closed, provided an emphatic counterpoint to a report by the Labor Department that US employers added 117,000 jobs in July, significantly more than the 46,000 in June and 53,000 in May. The unemployment rate improved slightly to 9.1 percent last month from 9.2 percent in June.

The Dow Jones industrial average, which plunged more than 500 points Thursday, jumped when markets opened yesterday on the employment report; nosedived as investors shifted their focus to the European debt crisis and underlying weakness of the US economy; and rebounded again to close higher on news that Italy took steps to resolve its debt problems. The Dow finished the day at 11,445, up 61 points.

The broader Standard & Poor’s 500 index declined slightly, while the technology heavy Nasdaq Composite index fell nearly 1 percent, after plunging 5 percent Thursday.

The New York Times reported that Treasury Department officials said that the S&P downgrade announcement was delayed after Treasury found a serious mathematical error in a draft of the report, which was provided to the government yesterday afternoon. The officials said that S&P inadvertently added $2 trillion to its projection of the federal debt. Treasury said S&P conceded the problem after about an hour of discussion.

The other rating agencies, Moody’s and Fitch, have said they have no immediate plans to downgrade the country’s credit rating, giving the government more time to make progress on debt reduction.

The lowering of the country’s rating could rattle confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery. The federal government makes about $250 billion in interest payments a year. So even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments.

Still, after several days of bad news and disappointing economic data, the July employment numbers were a relief, well above the 75,000 to 85,000 jobs economists were anticipating. Job losses were concentrated in government; private companies increased payrolls by 154,000.

In addition, the Labor Department said that job growth, while still weak, was better than initially reported in previous months. For example, job growth in June was initially estimated at just 18,000; that figure was revised to 46,000 yesterday.

“Everything about the report was solid,’’ said Mike Ryan, chief investment strategist for UBS Wealth Management Research Americas in New York.

Rose Grant, managing director for Eastern Investment Advisors in Boston, said the employment report suggests the economy is still growing - albeit slowly - and not headed toward another recession as many investors have feared. In addition, same-store retail sales figures rose Thursday, suggesting consumers are still spending money.

“The economy is still in slow-to-moderate growth mode,’’ Grant said. “This was news that the markets definitely needed to hear.’’

The Massachusetts economy has been growing faster than the nation as a whole, buoyed by its technology sector, as well as its cluster of universities, research hospitals, and life sciences firms. The Massachusetts unemployment rate stood at 7.6 percent in June. The July figures are slated to be released in two weeks .

Nationally, economists warned that job creation numbers are not yet strong enough to make a significant dent in unemployment. The country typically needs to add about 125,000 jobs a month just to keep up with population growth and will need to add 150,000 to 200,000 jobs a month to bring down the unemployment rate, economists said.

The labor market, some observers note, is even weaker than the official unemployment rate suggests. The rate balloons to 16.1 percent when people working part-time jobs because they can’t find full-time work and those who have given up job searches altogether are included. Only those who actively seek work are counted as unemployed.

Yesterday’s unemployment report was anxiously anticipated, after a steady drumbeat of gloomy economic data, including reports that showed weakening activity in manufacturing and a US economy that barely grew in the first half of the year. Many investors also remain worried about the agreement Congress reached this week to raise the debt ceiling.

Some fear its call to cut government spending at a time when it is needed to spur the economy.

Still, some financial executives said improving unemployment numbers could help squelch fears that the economy is sliding back into recession.

“I think it’s certainly going to give pause to those who have been reading the most tea leaves and were expecting a recession in the second half of the year,’’ said Roger Bayston, senior vice president of the Franklin Templeton Fixed Income Group in San Mateo, Calif., which manages more than $329 billion in assets.

But Bayston said he believes the market swings will continue until US economic growth accelerates and the debt worries in the United States and Europe ease.

“We’re struggling with those bigger issues that still need resolution,’’ Bayston said.

Material from the Globe wire services is included in this report. Todd Wallack can be reached at twallack@globe.com.

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