US stocks tumble on weak service-sector report

Wall Street plunged on Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year.

The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003. The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.

"The report drives a nail into the coffin from investors' minds that we're in a recession,'' said Todd Salamone, director of trading at Schaeffer's Investment Research. ``That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell.''

The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. Economists had expected another month of growth.

It's possible the service sector, which includes businesses ranging from restaurants to retailers to banks, could bounce back in February as the manufacturing sector did in January after its December contraction. The benefit of the Federal Reserve's two big interest rate cuts in the latter part of January could also help spur the service sector back into growth mode later this year.

Still, the data was particularly worrisome given last week's Labor Department report, which showed that the U.S. economy lost jobs in January for the first time in more than four years. Together, the two reports indicate that the ongoing credit crisis is dragging down the actual economy.

INTRADAY TIPS [ 06/02/2008]

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