WASHINGTON — Stocks fell sharply Tuesday amid new economic data that left Wall Street ever more convinced that the U.S. economy might already be in recession.
The three major stock indices all closed down by about 3 percent, after an Institute of Supply Management report showed a much-weaker-than-expected reading of the all-important services sector.
The report also showed that prices for items that the nonmanufacturing sector uses are rising briskly. This combination of a contraction in business activity and rising prices unsettled investors.
"In a recession-like report, the ISM nonmanufacturing business-activity index plummeted in January, with 14 of 18 industries reporting contraction," said Peter Kretzmer, a Bank of America senior economist.
In a note to investors, he described the drop in the services index as the largest ever, noting that it fell from 54.4 in December to 41.9 in January. Any reading above 50 suggests sustainable growth, while those below that point to contraction.
"The size of the declines reported this morning, as well as their breadth, surprised financial markets," he wrote.
Under usual circumstances, the ISM data wouldn't spook financial markets. But they follow last week's data showing the first negative job growth since August 2003 and anemic economic growth of just 0.6 percent in the fourth quarter of last year.
The Dow Jones Industrial Average shed 370.03 points, or 2.93 percent, to close at 12.265.13, while the S&P 500 was off 44.18 points, or 3.20 percent, to 1336.64 and the NASDAQ was down 73.28 points, or 3.08 percent, to 2309.57. The Dow is off 7.5 percent on the year.
The contractions in the entertainment industry, public administration, and professional and technical services sectors — all thought to be the most recession-proof — were of particular concern to investors.
"The services sector has been the engine of jobs growth for a number of months. With the services sector now in the process of contracting, we are now looking at further reductions in employment in the first quarter of 2008," said Brian Bethune, U.S. economist for the forecaster Global Insight in Lexington, Mass.
Recession is defined as two successive quarters of negative economic growth, and the National Bureau of Economic Research formally declares them after the fact.
The bureau's Business Cycle Dating Committee determines this based on "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales," according to its Web site.
The president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, said Tuesday that he expected a sluggish 2008. "I can also see the possibility of a mild recession, similar to the last two we have experienced; in other words, shallow and with a slow recovery."
Tuesday's market volatility puts more pressure on the Senate, which is scheduled to take up a roughly $145 billion economic-stimulus package Wednesday passed by the House of Representatives and supported by President Bush.
Senate Democrats seek to modify the House's proposed tax rebates of up to $600 for individuals and $1,200 for families. They'd roll back by $100 the rebates envisioned for anyone with earned income above $3,000. And they seek rebates for retirees and people with disabilities who don't earn income but rely on checks from the Social Security Administration.
Some Senate Democrats hope to tack on energy-assistance payments for the poor, extend unemployment insurance and perhaps expand food-stamp programs. Bush has called on the Senate to pass a bill that mirrors the bipartisan House measure, implicitly threatening a veto. Congressional leaders from both parties have promised to get legislation to Bush by Feb. 15.
"This latest indication that the economy has slipped into contraction mode should concentrate the minds of Congress — Congress needs to wrap up the fiscal stimulus bill," Bethune said in a note to investors.
ON THE WEB
More on how recessions are determined.