The Dow Takes A Drastic Triple Digit Dive
Tuesday, February 05, 2008JEFF YASTINE: Millions of Americans in 24 states voted in presidential primaries today, but on Wall Street, investors voted to sell. The Dow plummeted 370 points, its biggest one-day decline so far this year and the NASDAQ fell 73 points. The sell-off came on new economic data suggesting that the nation's service sector is contracting. The Institute for Supply Management said its index of non- manufacturing activity tumbled to a weak 41.9 reading. As Erika Miller reports, today's data is more evidence that the U.S. economy could be headed into recession.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: It could have been a cheerful day on Wall Street, with the New York Giants ringing the opening bell. But the mood was fearful as recession worries sacked the stock market. Market strategist Tony Dwyer says he's not surprised by the magnitude of today's decline.
ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: The markets are soft today on further evidence that you have economic weakness and that earnings are at risk. And when that's in the overall environment of a bear market which we've kind of been in, that creates even more weakness.
MILLER: The downturn was sparked by the Institute for Supply Management's non-manufacturing index, which plunged in January to its lowest level since the aftermath of September 11. Today's data is especially troubling for Wall Street, because it focuses exclusively on the services sector, the vast majority of the economy. BNP Paribas' Richard Iley says it's solid evidence the U.S. economy has reached its tipping point.
RICHARD ILEY, SR. ECONOMIST, BNP PARIBAS: I think the unequivocal message is one of economic weakness. And I think perhaps even more worryingly, that it suggests that we're getting to the point of the downturn where the economy is really lurching lower at an accelerating rate. In the jargon, us economists would say this is the point at which things get nonlinear.
MILLER: Comments from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, also added to worries about the economy. In prepared remarks, he predicted U.S. growth would be sluggish in the first half of the year. But he also raised the possibility of contraction, saying quote, I can also see the possibility of a mild recession, similar to the last two we have experienced. In other words, shallow with a short recovery. Economist Drew Matus is also betting the economy will skirt recession. He points to several factors that could help keep U.S. growth above the red line.
DREW MATUS, SENIOR MARKET ECONOMIST, LEHMAN BROTHERS: There's a lot of good things going on. A, the Fed is being incredibly aggressive; B, Congress is passing a stimulus package; and C, we can't count out the U.S. consumer completely. The labor market is not great, but there's still a large number of people, very low unemployment rate. So, the U.S. consumer should do reasonably well through the remainder of the year.
MILLER: But there's one thing nearly everyone on Wall Street can agree on -- odds are increasing for an aggressive rate cut by the Federal Reserve at the next policy meeting March 18, perhaps even before.
ILEY: I think their preference is to go in a smaller quarter percentage point increment. But if we get more numbers similarly weak to the survey today, they may well be pressured into going for a bigger 50 basis point, I think a half a percentage point cut.
MILLER: If the U.S. economy does enter recession, many experts think it will be worse than the last one in 2001. That's because, this time, they are worried about a sharp drop in consumer spending. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
