Stocks finished broadly lower Wednesday as the Fed's Beige Book report showed ongoing economic expansion but noted some regional economies slowing. A pair of economic reports earlier in the session suggested inflation remains significant and the economy remains strong, says Standard & Poor's Equity Research.
The Dow Jones industrial average fell 63.08 points, or 0.55%, to 11,406.2. The broader Standard & Poor's 500 dropped 12.99 points, or 0.99%, to 1,300.26. The tech-heavy Nasdaq composite shed 37.86 points, or 1.72%, to 2,167.84.
The Fed's Beige Book said the economy continues to expand, though five districts reported deceleration and seven districts posted little change in the pace of growth. "The tone is a little less upbeat than in recent reports," says Action Economics.
Meanwhile, second-quarter nonfarm productivity was revised to a 1.6% growth rate, up from an initial 1.1% reading. Unit labor costs were revised higher to 4.9% from 4.2%, rising at their highest annual pace in 16 years. Elsewhere, the Institute for Supply Management's services index rebounded to 57.0 in August after a three-month decline.
The higher labor cost numbers may cause the Fed to raise interest rates again, some analysts say. "The Fed specifically mentioned unit labor costs as a reason to be sanguine about the inflation outlook," says Lehman Brothers economist John Shin. "But now these Q2 labor costs revisions have completely changed that picture."
Others agree the Fed might have more work to do. "Underneath a swift housing downturn is a still-resilient economy that carries lingering inflation risks," says Richard Berner, chief U.S. economist at Morgan Stanley. "The housing downturn is accelerating, but fears of collateral damage to the economy are overblown."
The economic docket Thursday features July wholesale sales, expected to rise 0.7%. Weekly jobless claims figures are also on tap.
Among stocks in focus, Ford (F) was higher after the company named former Boeing (BA) executive Alan Mulally as the automaker's new president and CEO. Bill Ford will remain as executive chairman. Citigroup raised its recommendation on the stock from sell to hold.
Rival General Motors (GM) was higher after the comapny announced it will offer extended warranties on some new vehicles.
Shares of Intel (INTC dipped after the chipmaker said it will eliminate 10,500 jobs in a bid to save about $3 billion per year by 2008.
Computer maker Hewlett-Packard (HPQ) was lower after the company said director George Keyworth leaked confidential information to the media and will not be nominated for re-election.
Radio-station owner Clear Channel (CCU) was modestly higher after the company approved a $1 billion stock buyback.
Satellite radio operator XM Satellite Radio (XMSR) was lower on news that the SEC is probing how the company handles estimates of subscriber counts and the cost of signing up new customers.
In the energy markets, October West Texas Intermediate crude oil futures closed down $1.10 at $67.50 a barrel ahead of weekly inventory data due Thursday.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 52.4 points, or 0.88%, to 5,929.3. Germany's DAX index lost 71.01 points, or 1.21%, to 5,813.06. In Paris, the CAC 40 index was down 57.33 points, or 1.11%, to 5,115.52.
Asian markets ended lower. Japan's Nikkei 225 index dropped 101.87 points, or 0.62%, to 16,284.09. In Hong Kong, the Hang Seng index slid 180.29 points, or 1.03%, to 17,258.51. Korea's Kospi index declined 4.23 points, or 0.31%, to 1,357.01.
Treasury yields pressed higher after the rise in labor costs, but inched back from session highs following the Fed's Beige Book. The 10-year note fell in price to 100-19/32 for a yield of 4.8%, while the 30-year bond dropped to 93-01/32 for a yield of 4.95%.