Stocks dip after consumer data release

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NEW YORK -- Stocks dipped a bit Friday, the last trading day of the third quarter, with Wall Street relieved about solid readings on the economy but cautious ahead of October's corporate earnings reports.

The market's losses were small, thanks to positive reports on consumer spending, construction spending, inflation and Midwest manufacturing. Though strong economic data might lower the chance that the Federal Reserve will further reduce rates, the tame inflation measure kept hopes of a rate cut alive.

Last week the Fed, reacting to August's tightening credit and plunging stocks, helped restore confidence in the financial markets by decreasing the federal funds rate target by a half point to 4.75%. The central bank's rate decrease, the first in four years, helped the major stock indexes finish in positive territory for the quarter.

"A second Fed cut will go a long way in reassuring the stock market that the worst is over. The focus going forward will be whether the Fed is going to lower rates to shore this up, or decide the risk of inflation is too high," said Janna Sampson, director of portfolio management at Oakbrook Investments.

Though energy and food prices are surging, core inflation has been within the Fed's comfort zone of 1% to 2%. The Commerce Department's consumer spending report showed that a key core inflation gauge logged a year-over-year rise in August of 1.8% -- the smallest increase since a similar rise in February 2004.

But continuing to weigh on investors is the concern that corporate profits dropped off in the third quarter. Friday is the last trading day of one of the most volatile periods in years, one that pulled stocks sharply lower after the Dow Jones industrial average closed at a record 14,000.41 in mid-July. Wall Street now is bracing for signs, ahead of the mid-October onslaught of earnings reports, of how companies fared during the summer's tumult.

The Dow slipped 17.31, or 0.12%, to 13,895.63. The blue-chip index ended the third quarter 3.6% higher.

The Standard & Poor's 500 index fell 4.63, or 0.30%, to 1,526.75, finishing the quarter up 1.6%.

The Nasdaq composite index fell 8.09, or 0.30%, to 2,701.50, and closed the quarter with a gain of 3.8%.

But the Russell 2000 index of smaller companies has not recovered from August's drop, during which investors pulled money out of the shares of fledgling companies that rely heavily on the credit markets for cash. The Russell on Friday fell 8.56, or 1.05%, to 805.45, and ended the quarter down 3.4%.

Bonds declined, pushing the yield on the 10-year Treasury note up to 4.59% from 4.57% late Thursday.

The dollar slumped against most major currencies as inflation appeared to be easing. The euro surpassed $1.42 for the first time, hitting a record against the U.S. currency for the seventh straight session.

Crude oil prices fell $1.12 to $81.66 a barrel on the New York Mercantile Exchange, but remain near historic highs.

"We're going to see crimped corporate profits if they eat those (commodity) costs, and inflation if they pass those down. Neither of those are good," Sampson said.

So far, consumers and businesses seem to be holding up despite high energy prices, the weak housing market and the summer's market volatility.

The Commerce Department said Friday that consumer spending increased 0.6% in August, the fastest growth in more than two years. But Bernard Baumohl at the Economic Outlook Group LLC projected that holiday spending will increase 3.5% this year, less than the 4.5% of last season.

Meanwhile, August construction spending rose, to analysts' surprise, by 0.2%; Chicago's National Association of Purchasing Management said regional business activity increased in September by more than expected; and the University of Michigan said consumer sentiment during the month held steady.

As the turbulent third quarter draws to a close, investors are slightly less concerned about the tightening in the credit markets that sent stocks plummeting in late July and August. On Thursday, the Fed said banks slowed their borrowing from central bank this week to the smallest amount in six weeks, after a huge spike last week.

But while most agree conditions have improved, the credit markets still haven't returned to normal. Levels of outstanding asset-backed commercial paper fell about 17% in the week ending Wednesday -- not as steep a decline as seen a few weeks ago, but still suggesting that demand isn't meeting supply.

"We have tentative signs that the financial markets are beginning to recover from the recent upset, but financial fragility is obviously still an issue," said St. Louis Fed President William Poole in prepared remarks Friday in New York.

Declining issues outnumbered advancers by about 9 to 7 on the New York Stock Exchange, where volume came to 1.34 billion shares.

In overseas trading, Britain's FTSE 100 fell 0.30%, Germany's DAX index rose 0.10%, and France's CAC-40 fell 0.31%. Japan's Nikkei index fell 0.28% and Hong Kong's Hang Seng Index rose 0.29%.
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