Stocks plunge on weak consumer spending

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NEW YORK -- Wall Street plunged Thursday as multiplying concerns about inflation and slower economic growth erased optimism about the Federal Reserve's positive take on the economy just a day earlier. The Dow Jones industrials skidded nearly 200 points.

Inflation fears revived as crude oil vaulted to a record $96 a barrel before easing. Meanwhile, a report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.

That combination led investors to retreat from Wednesday's rally, in which the Dow climbed 137 points after the Fed -- while cutting interest rates a quarter point -- said the economy had weathered the summer's credit crisis. The assessment temporarily put to rest Wall Street's concerns that tighter credit was crippling the economy.

But the Fed also warned that inflation remained a concern, and oil's ascent to another record raised the prospect not only that the Fed might stop cutting rates, but that might even consider raising them.

"Wall Street is in love with the idea of a rate cut, and realized that the Fed said inflation is still a concern -- that lowered the chances of a cut in December," said Ryan Detrick, a senior technical strategist with Schaeffer's Investment Research. "We're now feeling the pain now that investors have slept on it, and figured out what they said."

Stocks also moved lower after Exxon Mobil Corp., the world's biggest publicly traded oil company, posted a second-straight retreat in quarterly profit for the first time in five years. Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks, were downgraded by CIBC on worries about the credit markets -- causing financial stocks to tumble.

The Dow plunged 198.67, or 1.43%, to 13,731.34 after being down more than 200 earlier.

The Standard & Poor's 500 index was off 21.49, or 1.39%, at 1,527.89, while the Nasdaq composite index dropped 32.40, or 1.13%, to 2,826.72.

Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note fell to 4.37% from 4.47% late Wednesday.

The Commerce Department's report that consumer spending rose by 0.3% in September, slightly lower than the 0.4% increase that analysts expected, raised concerns about a slowing economy, and worries that the Fed might still consider inflation a more important issue.

In addition, the performance of the manufacturing sector in October suggested that ongoing troubles in the housing and credit markets have seeped into the industrial sector. The Institute for Supply Management, a Tempe, Ariz.-based trade group, reported its manufacturing index registered 50.9, down from 52.0 in September and below expectations for 51.8. A reading above 50 indicates growth; below that spells contraction.

Also Thursday, the Labor Department said the number of people filing for unemployment benefits declined by a larger-than-expected 6,000 last week to total 327,000.

Crude prices pulled back after surpassing $96 per barrel in overnight trading, but that decline did not ease Wall Street's worries. A barrel of light sweet crude fell $1.79 to $92.74 on the New York Mercantile Exchange.

Wall Street was also troubled by the day's corporate news, including Exxon's report that its profit fell 10% during the third quarter because of lower refining and chemical margins. Shares of the Dow component dropped $2.86, or 3.1% to $89.13.

Financial stocks fell on lingering worries about the aftereffects of the credit crisis. CIBC World Markets on Thursday downgraded both BofA and Citigroup on concerns about sluggish growth in 2007.

Bank of America, the nation's second-largest bank, dropped $1.78, or 3.7%, to $46.50. Citi, the nation's largest financial institution, dropped $2.96, or 7.1% to $38.40 -- its lowest level in four years.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 229.3 million shares.

The Russell 2000 index of smaller companies was down 20.21, or 2.44%, at 807.81.

The plunge in U.S. stocks caused European bourses to tumble. In afternoon trading, Britain's FTSE 100 was down 1.66%, Germany's DAX index fell 1.33%, and France's CAC-40 dropped 1.80%. Japan's Nikkei stock average, which closed before U.S. markets opened, rose 0.79%.
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