Stocks stumble after record drop in incomes

Pay plunges by greatest amount in three years; spending slows

Market update

Overseas markets

updated 2:25 p.m. ET Aug. 29, 2008

NEW YORK - Stocks tumbled Friday after the government said personal incomes fell last month by the largest amount in nearly three years while consumer spending slowed. The Dow Jones industrial average fell more than 100 points, while a disappointing profit report from computer maker Dell Inc. weighed on the technology-heavy Nasdaq composite index.

Meanwhile, oil prices rose moderately as investors charted the path of Tropical Storm Gustav as it heads toward the Gulf of Mexico and its oil rigs and refineries.

Wall Street’s retreat following the downbeat news about consumers also comes after several days of sizable gains in stocks and on the final session before the long Labor Day weekend. Pre-holiday trading is generally light and some pullback was to be expected.

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Still, investors were uneasy after the Commerce Department reported that personal incomes fell by 0.7 percent in July — well beyond the drop of 0.1 percent that analysts polled by Thomson IFR had predicted on average. That reflects the waning impact of tax rebate checks that Americans received this spring.

As expected, the government also said consumer spending rose a modest 0.2 percent. That was below the 0.6 percent increase seen in June and, accounting for rising prices, spending fell by 0.4 percent in July. Wall Street has been particularly concerned about Americans’ ability to help the economy grow, as high prices for gas and food have strapped many household budgets.

“My biggest concern with the income data is that we’re getting off to a weak start to the third quarter,” said Robert Dye, senior economist at PNC Financial Services Group. “The income numbers are a reminder that the economy is going to look worse before it gets better.”

In midafternoon trading, the Dow Jones industrial average was down more than 1 percent. The blue chips began the session having logged a three-day advance of nearly 330 points.

  News moving the markets
  Incomes plunged in July as spending slowed
Consumer outlook up more than expected
  Gas prices edge up before Labor Day weekend
Mortgage mess puts more banks at risk

Broader stock indicators also fell. The Standard & Poor’s 500 index and the Nasdaq both declined.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to an anemic 434.1 million shares. Trading has been light all week, prompting some observers to dismiss the market’s moves as aberrations that occur when many traders are on vacation.

Bond prices fell Friday. The 10-year note’s yield, which moves opposite its price, rose to 3.82 percent from 3.79 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude rose 42 cents to $116.01 per barrel on the New York Mercantile Exchange. So far, oil trading has been fairly orderly as Gustav progresses, although there is concern about damage from the storm or a disruption in the flow of gasoline and other fuel from Gulf Coast refineries.

Although many investors are fixated on consumers, Wall Street showed little reaction to the Reuters/University of Michigan’s index on consumer sentiment, which rose to its highest level in five months. Still, most economists reason that consumers who are upbeat about their prospects are more likely to spend.

Also, investors shrugged off the Chicago Purchasing Managers’ index, which measures business conditions across Illinois, Michigan and Indiana. It jumped to 57.9 from 50.8 in July. The index is considered a precursor to the Institute for Supply Management’s manufacturing survey on Tuesday. Investors also will be looking next week to readings on the service sector, construction, factory orders and employment.

Ahead of next week’s figures concerns arose Friday about the tech sector after Dell’s report. Dell shares fell sharply after the company’s profit margins came in well below what analysts had been expecting.