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After opening sharply lower, small-cap stocks are continuing to get pummeled mid-session by the worst jobs data this economic cycle has seen yet, rekindling concerns about the state of the U.S. economy. Crude oil gushed back to near record highs, also dragging the market lower.

At 1:18 p.m. ET, the Russell 2000 (NYSE:IWM) had plummeted 15.5, or 2.03%, to 747.77, while the Dow plunged 298.65, or 2.37%, to 12,305.80

Wall Street got a reality check this morning after the Labor Department reported that the unemployment rate jumped a shocking 0.5% to 5.5% in the month of May, the highest since October 2004 and the largest month-to-month increase since February 1986. Economists had forecast a much lower uptick in the unemployment rate to 5.1% from 5%. Non-farm payrolls clocked in at minus 49,000, which was better than the forecast for a slide of 58,000.

“In the post World War II period, every time the unemployment rate has jumped by a full percentage point in the course of a year, the economy has slipped into recession,” Steven Wood, chief economist with Insight Economics, said in an email report. “The bottom line is that jobs declined in May and the economy has clearly slipped into a mild jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy. Persistent job losses will eventually pull the overall economy into recession.” 

BMO Capital Markets foreign exchange strategist Andy Busch says the question is whether the survey week of May 12th captured skewed data or if the seasonal adjustment was somehow unable to correct for a surge, which accounted for two-thirds of the increase in the move from 5.1% to 5.5%.

“This month underscores that volatility and disconnect with a massive increase in job seekers as the labor force rose 577,000 and the participation rate rose to 66.2% from 66%,” Busch said in an email. “Without it, we see employment at only 5.2%. Also, the data toward the end of the month is showing that the economy is not . . .

The Russell 2000 (IWM) rose for the first time this week despite news that painted a bleak picture of the U.S. economy. The small-cap index added 10.29 points, or 1.49%, to 702.78. The Dow Jones Industrial Average (INDU) added 46.90 points, or 0.38%, to 12,247.00.

On a year-to-date basis, the Russell 2000 has shed 8.26%, while the Dow has let go 7.67% and the S&P 500 has left behind 8.95%.

Small-cap stocks went on a rollercoaster ride that started with a decline out of the gate as investors reacted to news that U.S. retail sales in January generally missed already low expectations.

That’s a worrying sign that consumers have pulled back and the economy is either headed for a recession or already in one.

Grabbing the headlines was Wal-Mart Stores, Inc. (NYSE: WMT), which announced that its January same-store sales increased a paltry 0.5%, below the forecasted 2%. If American consumers really are reining in their spending, the squeeze won’t be felt just by the world’s largest retailer.

“Smaller-cap retailers are definitely more volatile than their larger brethren, many times because they are focused on one particular niche,” said Eric Beder, a retail analyst with investment bank Brean Murray, Carret & Co., in an email.