NEW YORK (AP) — Evidence that consumers are still holding off on spending drove stocks sharply lower Friday, tempering enthusiasm from the day before over the economy’s growth in the third quarter.
Major stock indexes fell more than 1.5 percent in midday trading, including the Dow Jones industrials, which tumbled about 164 points, giving back a chunk of the previous day’s 200-point gain.
Investors shed stocks after the Labor Department said personal spending fell 0.5 percent in September. Though the decline was in line with forecasts, it was the largest drop in nine months and followed a 1.3 percent jump in August fueled by the government’s popular Cash for Clunkers car rebate program.
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A drop in the mood of consumers was also discouraging. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October from 73.5 in September. The reading was revised slightly higher from a preliminary estimate of 69.4 earlier this month, and was roughly in line with expectations.
The market is paying close attention to indicators of consumer spending, which is still in a slump despite improvements in other parts of the economy such as manufacturing and housing. Spending by consumers makes up a major part of the U.S. economy.
The day’s news fanned fears that weak spending by consumers will continue to hold the economy back and put a damper on the market’s excitement over a 3.5 percent jump in gross domestic product in the third quarter. The stronger-than-expected growth in the economy came after four straight quarters of declines and was the most promising evidence yet that the longest recession since the 1930s has ended. Stocks soared following the report, giving the Dow its best one-day performance since July.
But many economists worry that much of GDP growth came from government stimulus measures and that without a rebound in consumer spending the economic recovery won’t be sustainable.
The Labor Department also reported Friday that personal income, the fuel for future spending, was flat in September compared with the previous month, in line with expectations. A lack of income growth is due, in part, to ongoing high unemployment rates, also a major worry for the market.
“Until we get to better employment numbers, it’s hard to get real income growth and real spending … and we’re just not there yet,” said Kurt Karl, chief US economist at Swiss Re. “Today is a reaction to a little bit of excess exuberance yesterday.”
The Dow fell 164.15, or 1.7 percent, to 9,798.43. The Standard & Poor’s 500 index fell 19.11, or 1.8 percent, to 1,047.00, and the Nasdaq composite index lost 34.80, or 1.7 percent, to 2,062.75.
© 2009 The Associated Press. All rights reserved.
