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Stocks Drop on Weak Manufacturing Report

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TIM PARADIS | January 2, 2008 06:02 PM EST | AP

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NEW YORK — Wall Street skidded lower Wednesday after a weaker-than-expected reading on the manufacturing sector and a spike in oil prices to $100 a barrel triggered concerns of a further slowdown in the overall economy.

The major indexes each lost more than 1 percent, with the Dow Jones industrials giving up more than 200 points. It was the blue chip index's biggest point decline for the first day of trading in a new year.

The Institute for Supply Management's report that its manufacturing index fell to 47.7 percent for December from 50.8 percent in November raised concerns that the economy could be slowing at a quicker pace than some investors had estimated. The reading below 50 signals economic contraction, whereas readings over 50 indicate expansion.

Analysts polled by Thomson/IFR had anticipated that manufacturing would expand modestly in December.

Light, sweet crude rose $3.64 to $99.62 per barrel on the New York Mercantile Exchange after earlier hitting $100 for the first time. The rise follows violence in the oil-producing nation of Nigeria, concerns about weather-related production halts in Mexico and speculation that inventory figures will show drops in levels of U.S. supplies.

The economic reading and rising oil prices were unwelcome for investors wading into the first trading session of 2008 and indicated the concerns that weighed on stocks in the second half of 2007 will for now persist.

"It certainly is a soft number and the declines in production and new orders are eye-catching," said Alan Levenson, chief economist at T. Rowe Price Associates Inc. "Overall, the ISM has generally been a decent guide for the economy. This is a sharp decline in one month."

Stocks failed to gain momentum after an initial bounce after minutes from the Federal Reserve's last meeting. Central bankers, who voted to cut interest rates a quarter percentage point, called the economic outlook "unusually uncertain." While that strengthened the case for lower rates, it also confirmed some of the market's worst fears about the economy.

The Dow fell 220.86, or 1.67 percent, to 13,043.96. The blue chips briefly fell below 13,000 for the first time since November.

Broader stock indicators also fell sharply. The Standard & Poor's 500 index slid 21.20, or 1.44 percent, to 1,447.16, and the Nasdaq composite index fell 42.65, or 1.61 percent, to 2,609.63.

Bond prices surged after the ISM report. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.89 percent from 4.03 percent late Monday. It rose to 3.91 percent in after-hours trading.

The dollar was mixed against other major currencies, while gold prices reached a 28-year high.

Declining issues outnumbered advancers by about 4 to 3 on the New York Stock Exchange, where consolidated volume came to 3.32 billion shares, up from 2.38 billion on Monday.

The weak manufacturing reading came as Wall Street entered 2008 still uneasy over the economy, specifically the state of the housing market and tightness in the credit markets brought on by fears of faltering mortgage debt. In addition, the health of the consumer is again in focus as investor are awaiting the government's December employment report, due Friday.

Investors weren't swayed by the release of the Fed's minutes from its Dec. 11 meeting. Central bankers cut rates amid worries about housing, credit and financial markets _ and kept all their options open for their next move, according to the minutes.

"We didn't really learn anything new," said Ryan Larson, senior equity trader with Voyageur Asset Management. "The Fed continues to be stuck between a rock and a hard place in terms of fighting inflation and managing U.S. growth."

The arrival of the new year was accompanied by a return of more of Wall Street's regular players. The recent weeks surrounding the holidays have seen light trading volume, making it hard to draw any meaningful reading on the market's mood. Moves higher or lower tend to be exaggerated amid light sessions.

In corporate news, National City Corp. fell 87 cents, or 5.3 percent, to $15.59 after halving its dividend and shutting down its wholesale mortgage business. The move, which eliminates 900 jobs, comes amid continued weakness in the housing and credit markets.

Chip stocks fell after Bank of America issued a bearish assessment for the sector. Intel Corp. fell $1.31, or 4.9 percent, to $25.35, while Advanced Micro Devices fell 36 cents, or 4.8 percent, to $7.14.

Amazon.com Inc. gained $3.61, or 3.9 percent, to $96.25 after Citi Investment Research raised its rating on the online retailer.

The Russell 2000 index of smaller companies fell 12.48, or 1.63 percent, to 753.55.

Overseas, Germany's DAX index fell 1.47 percent and France's CAC-40 lost 1.14 percent.

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(This version CORRECTS to 'cut' sted 'raise' in 8th graf.)