Economy cools more than expected, rattling stock market

The US economy slowed sharply during May, according to a series of reports Wednesday that pushed stock prices down sharply.

The Dow Jones Industrial Average fell 2.2 percent for the day, as news about job creation, manufacturing activity, and auto sales all showed signs of weakness.

As the Dow lost almost 300 points from Tuesday's close – dropping to 12,290.14 – the broader Standard & Poor's 500 index also fell by 2.3 percent.

It was a reality check for investors, who have been banking on the notion of a firmer economy in the year's second half. Many economists still predict that economic growth will strengthen, but the climb looks tougher now than it did last week.

"There are good reasons to suppose that growth will accelerate in the second half of the year, helped by some easing in energy prices," economist Nigel Gault, of forecasting firm IHS Global Insight, wrote Wednesday. "But the present 'soft patch' is proving to be softer than anticipated."

Some economists, including Peter Morici of the University of Maryland, see a new recession as a distinct danger. If consumers remain wary, the pace of hiring will slow. One concern: Even a growing economy can lose jobs, because businesses tend to improve their productivity by about 2 percent a year.

The reports Wednesday covered key areas of the economy:

• An estimate of private-sector job creation, conducted monthly by the payroll-processing firm ADP, showed a gain of just 38,000 jobs in May. That was much lower than economists expected, and prompted some forecasters to scale back their expectations for the official May jobs report from the Labor Department, which is due on Friday. The weakness was spread broadly among various industries.
  
• A gauge of manufacturing activity, compiled by the Institute for Supply Management, fell sharply for the month. The index level of 53.5 for May still signaled positive growth (a reading above 50 indicates expansion). But the number was a big downshift from April, when the ISM index stood at 60.4. Mr. Gault said the good news is that inventories aren't excessive, so factories can keep chugging along. But one of the economy's few areas of strength is on a slower track.
  
• Auto sales weakened in May as consumers ran up against tight supplies of popular fuel-efficient cars – and as they fretted about whether now is a good time for a big-ticket purchase. The Japan earthquake, affecting supply chains for firms like Toyota and Honda, also dragged down activity in the industry.

Wednesday's news comes on top of a sobering report on the US housing market, released a day earlier. The S&P Case-Shiller index of US home prices fell for the first quarter to a level beneath its 2009 recession low point, signaling protracted weakness in a sector that typically helps to fuel growth during economic recoveries.

ADP, which produced the weak job numbers, has proven to be an imperfect forecaster of Labor Department numbers. Many economists, while lowering their forecasts, still expect the economy to post official job gains of more than 100,000 when those numbers are released Friday.

And many, like Gault, still expect modest growth in the year's second half.