Continuing stocks plunge worries investors

August 3, 2011

The Seattle Times

Kevin G. Hall

WASHINGTON — The longest decline in stock prices since the nation's financial crisis started in 2008 has investors worriedly watching new economic indicators expected this week for signs that the economy is slipping back into recession.

Stocks plunged Tuesday, despite Congress' final approval of a deal that avoided what would have been a devastating default on the nation's debt. The financial markets looked past the closing act of political theater to the real and present danger of a slowing economy and worsening economic problems in Spain and Italy.

The Dow Jones industrial average tumbled 265.87 points, or 2.2 percent, to close at 11,866.62. The decline marked the eighth consecutive day of losses, the longest continuous stock slide since October 2008, when the U.S. financial crisis was at full throttle. The S&P 500 shed 32.89 points, or 2.6 percent, to its lowest close of the year at 1254.05.

Whether the slide continues depends on key economic indicators.

On Wednesday, two key economic reports will be made public: activity in the services sector and the ADP National Employment Report, which often anticipates the Labor Department's report on hiring and unemployment, which comes out Friday. Thursday will show whether last week's drop in first-time jobless claims was an aberration or the start of stronger hiring.

What most spooked the markets Tuesday, however, were dismal government statistics on income and consumption. Personal spending fell 0.2 percent, the first such drop in nearly two years. Wages and income were flat in June, the Commerce Department said, and consumers upped their savings rate from 5 to 5.4 percent. Usually that would be a good thing, but in an economy stuck in neutral, it's consumption, not savings, that's needed to spark hiring.

"This is another dismal report on the consumer side of the economy. Consumer mood is at depressed levels and those households that are not living paycheck to paycheck are saving more," Chris Christopher, a senior economist at forecaster IHS Global Insight, wrote in a note to investors. "This is considerably worrisome, since we are a consumer-oriented economy."

Weak auto-sales numbers for July also were troubling investors. The poor consumption and auto numbers came on the heels of Monday's survey of purchasing managers, with a key index showing a sharp drop in manufacturing activity to levels barely above economic contraction.

Those grim numbers followed Friday's worse-than-expected economic growth numbers for the second quarter, which ran from April through June. The economy grew at an annualized rate of just 1.3 percent over those three months, with government statisticians sharply revising estimates from January to March down to just 0.4 percent growth.

It all points to an economy that's losing steam at a dangerous clip. The chief economist for the influential U.S. Chamber of Commerce, Martin Regalia, described the U.S. economy — growing at an annual rate under 1 percent this year and just 1.6 percent over the past 12 months — as "about as weak as you can get without going into a recession."

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