U.S. Stocks Fall on Services Data Amid Federal Shutdown

U.S. stocks fell, with the Standard & Poor’s 500 Index sliding the most in a month, as data showed weaker-than-forecast growth in service industries and concern grew that the political impasse could lead to a recession.

Eli Lilly Co. dropped 3.4 percent after the drugmaker said it would be “challenging” for it to meet its 2014 sales target. United Technologies Corp., a supplier of helicopters and jet engines to the military, retreated 1.8 percent after saying the shutdown would lead to as many as 5,000 temporary layoffs.

The S&P 500 lost 1.3 percent to 1,672.41 at 11:56 a.m. in New York, its biggest drop since Aug. 27. The Dow Jones Industrial Average slid 166.52 points, or 1.1 percent, to 14,966.62, headed for its lowest close since Sept. 6. Trading in S&P 500 stocks was 2.1 percent above the 30-day average at this time of day.

“What we are starting to realize today especially is that this might go on for a while,” Mike Sorrentino, who helps oversee about $3 billion as chief strategist at Global Financial Private Capital LLC, said by phone from Sarasota, Florida. “The debt ceiling is a cause for concern. If we can get through that and we can get through the dysfunction with this government, there will be a much safer road ahead.”

Talks last night between congressional leaders and the president failed to break the fiscal stalemate, with both sides repeating the positions they’ve held for weeks. The budget standoff raises concern the dispute may affect talks to increase the $16.7 trillion debt ceiling this month.

Catastrophic Consequences

The Treasury has said measures to avoid exceeding the borrowing limit will be exhausted by Oct. 17 and warned today that a default caused by failure to raise the cap could have catastrophic consequences that might last decades.

“Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation,” the Treasury said in the report.

“The real test will be the debt ceiling,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “Here the government really cannot afford to not increase it in due time.”

S&P stripped the U.S. of its AAA credit rating in August 2011 amid a stalemate between Obama and Congress over whether to raise the debt ceiling, and the S&P 500 fell more than 11 percent in three days.

Economic Effect

The losses were later reversed, as the Federal Reserve pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy. The S&P 500 gained 25 percent in the 12 months through August 2012.

The S&P 500 (SPX)gained 0.7 percent in the first two days of the first partial government shutdown in 17 years, as investors speculated any economic effects from the impasse would be limited.

A partial shutdown lasting one week would probably shave 0.1 percentage point from economic growth, according to the median estimate of economists in a Bloomberg survey, with the costs accelerating if the closure persists.

Data today showed service industries in the U.S. expanded in September at a slower pace than forecast, indicating a pause in the momentum of the biggest part of the economy before the federal government closed.

The Institute for Supply Management’s non-manufacturing index fell to 54.4 in September from 58.6 the prior month. The median forecast in a Bloomberg survey called for a drop to 57. The figure includes industries that range from utilities and retail to health care, housing and finance and make up almost 90 percent of the economy.

Jobs Data

A separate report from the Labor Department showed fewer Americans than forecast filed applications for unemployment benefits last week, indicating U.S. employers were maintaining staff counts in the days leading up to the government shutdown.

The Labor Department will not release its September payrolls report tomorrow as scheduled because of the shutdown.

Investors have been scrutinizing data to determine whether the Federal Reserve will curb bond purchases after its meeting this month. The S&P 500 rallied 4.7 percent in the third quarter as the central bank maintained stimulus measures and companies reported better-than-estimated earnings.

Government Contractors

All 10 main S&P 500 industries retreated at least 0.5 percent today, with industrial stocks sinking 1.6 percent to pace declines. Boeing Co. dropped 2.5 percent to $114.95 for the steepest slide in the Dow.

A Bloomberg index that tracks 70 companies that get at least 3.5 percent of their revenue from federal contracts fell 1.6 percent today, extending its decline this week to 7.9 percent.

United Technologies (UTX) lost 1.8 percent to $103.06. The military contractor said the impasse will force it to lay off as many as 5,000 employees. The first effect will be layoffs for about 2,000 Sikorsky Aircraft employees in Connecticut, Florida and Alabama on Oct. 7, the contractor said yesterday.

UTC receives about 18 percent of its revenue from the government, Chief Financial Officer Gregory Hayes told analysts this week.

“The comments made by United Technologies will be a good proxy for what to expect,” Nigg said. “Most companies will most likely continue to provide very cautious guidance in general, and the shutdown isn’t helping.”

Lilly Forecast

Eli Lilly lost 3.4 percent to $48.82. The drugmaker said a slowdown in emerging markets and the weakening of the yen will make it “challenging” for it to meet its 2014 sales target.

Lilly also plans to repurchase $5 billion of shares over time, the company said in a statement today. The Indianapolis-based company reaffirmed its goal of generating at least $20 billion in revenue, $3 billion of net income and $4 billion of operating cash flow next year.

Zale Corp. sank 11 percent to $14.05 after the jewelry retailer registered to issue 11.06 million shares related to warrants it sold in 2010. The Wall Street Journal reported that private equity firm Golden Gate Capital Inc. has the right to buy the stock at $2 a share.

PVH Corp. jumped 3 percent to $121.07. The maker of Calvin Klein and Tommy Hilfiger clothing said yesterday that it plans to sell its G.H. Bass and Co. division to G-III Apparel Group Ltd. for $50 million in cash.

Constellation Brands Inc. added 1.3 percent to $59. The maker of Svedka Vodka, Black Velvet Canadian Whiskey and Robert Mondavi wines raised its earnings forecast for fiscal 2014 after reporting second-quarter earnings that surpassed analyst expectations.

To contact the reporters on this story: Alex Barinka in New York at abarinka2@bloomberg.net; Aubrey Pringle in New York at apringle1@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net