Wall Street stumbled Friday after a key survey showed manufacturing unexpectedly contracted in November for the first time in more than three years, stoking concerns that the US economy won't be able to achieve a soft landing. The major indexes ended the week with losses.
Stocks and the dollar were socked after the Institute for Supply Management said its index on manufacturing fell to 49.5 from 51.2 in October. Economists had been expecting 51.5. Anything under 50 indicates the manufacturing sector is contracting.
The report, based on a survey of corporate purchasing managers, was seen by some on Wall Street as indicating that the Federal Reserve might have overshot the mark in more than two years of interest rate hikes that ended in June. Wall Street had been expecting the Fed would hold interest rates steady at its December 12 meeting, and now there is a growing belief the central bank may soon cut rates because of economic weakness.
"This is just additional confirmation that the economy is not only slowing but quite possibly going into a recession," said Hugh Moore, a partner with investment firm Guerite Advisors. "It's not just the housing and auto industry any longer, now we're finding out that manufacturing in general is slowing."
Moore said an ISM number below 50 has preceded every US recession since the 1960s.
Leading the Big Board lower in volatile trading were shares of manufacturers like 3M Co., Caterpillar Inc., and United States Steel Corp. The Dow Jones industrial average fell 27.80, or 0.23 percent, to 12,194.13.
Broader stock indicators also declined. The Standard & Poor's 500 index dropped 3.92, or 0.28%, to 1,396.71, and the Nasdaq composite index fell 18.56, or 0.76%, to 2,413.21.
The drop does not bode well as Wall Street hopes to finish the final month of the year with double-digit growth. The Dow is up 13.78% so far this year, while the S&P 500 has gained 11.89% and the Nasdaq is up 9.43%.
This week, the Dow fell 0.70%, the S&P index fell 0.30%, and the Nasdaq gave up 1.91%.
The ISM news had a big effect on other markets. Bonds rose, with the yield on the benchmark 10-year Treasury note falling to an 11-month low of 4.43% from 4.46% late Thursday.
The dollar continued its slide against major currencies, except the yen. Also hitting the dollar was a Commerce Department report that US construction spending took its biggest tumble in five years in October.
Still, Wall Street, which on Monday had its worst decline in four months because of poor sales at Wal-Mart Stores Inc., suffered only moderate damage from the ISM report.
"Considering all of the bad economic news out there, we didn't see a monster sell off," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research in Cincinnati. "This was a pullback that may have been needed to strike a little bit of fear that would be enough to create another unwinding. A lot of negative sentiment can be unwound."
Exactly where the Fed goes from here will continue to be debated by economists. Speeches on Friday by Fed Chairman Ben Bernanke, Chicago Fed President Michael Moskow, and Richmond Fed President Jeffrey Lacker failed to give any new hints.
Manufacturers were among the biggest decliners, touching sectors from chip makers to steel companies. Heavy equipment maker Caterpillar Inc. fell 84 cents to $61.19. Intel Corp. declined 47 cents, or 2.2%, to $20.93. US Steel fell $1.79, or 2.4%, to $73. 3M fell $1.48 to $79.98.
Automakers were also in focus as they reported November car and truck sales. Ford fell 9 cents to $8.04 after it reported US sales slipped 9.6%, while DaimlerChrysler AG dropped 29 cents to $57.99 after posting a 4.7% rise. Toyota Motor Corp.'s monthly sales surpassed Ford's - the No.2 US automaker - for only the second time ever.
General Motors Corp. rose 46 cents to $29.69 in heavy volume after a report that financier Kirk Kerkorian dumped his stake in the world's largest automaker for more than $800 million. He had about 28m. shares left, which were sold off late Thursday, according to The Wall Street Journal. Investors seemed little moved by the company's November auto sales report, which showed an increase of 5.8%.
Home Depot Inc. shares surged $1, or 2.6%, to $38.98 on speculation the home improvement chain might be an acquisition target by several private equity firms.
H&R Block Inc. declined after the nation's largest tax preparer reported a wider-than-expected loss during the second quarter as its mortgage lending arm continues to lose money. H&R Block fell 25 cents to $23.75.
The Russell 2000 index of smaller companies fell 4.95, or 0.63%, to 781.17.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where consolidated volume came to 2.83 billion shares, compared with 4.01b. shares on Thursday.
Japan's Nikkei stock average closed up 0.29%. Britain's FTSE 100 closed down 0.45%, Germany's DAX index ended down 1.08%, and France's CAC-40 fell 1.38%.
The Dow Jones industrials ended the week down 86.04, or 0.70%, to finish at 12,194.13. The S&P 500 index fell 4.24, or 0.30%, to end the week at 1,396.71. The Nasdaq fell 47.05, or 1.91%, to finish the week at 2,413.21.
The Russell 2000 index closed the week down 11.11, or 1.40%, at 781.17.
The Dow Jones Wilshire 5000 Composite Index - a free-float weighted index that measures 5,000 US based companies - ended the week at 14,077.72, down 58.53 points from last week. A year ago the index was at 12,685.10.