Downturn Shows Up on Main Street

Dow Drops 370 After Key Index Shows Damage to Service Sector

The stock market plummeted yesterday after a report that businesses that account for a vast portion of the U.S. economy are shrinking.

A key index of activity at non-manufacturing businesses fell in January to its lowest level since the 2001 recession, as a downturn that began in the housing and financial markets spread to industries including hospitality, banking, insurance, telecom and retail.

That led the Dow Jones industrial average to its steepest one-day percentage decline in nearly a year. The Dow was off 370 points, or 2.9 percent. The 3.2 percent drop in the broader Standard & Poor's 500-stock index was its worst single-day tumble since Feb. 27, 2007. Stock indicators nonetheless remain above their lows in January.

"It looks recessionary to me," said Scott Anderson, a senior economist at Wells Fargo, speaking about the survey. "What started in the subprime mortgage market has spread across the economy. We're seeing it show up in main street America."

The Institute for Supply Management surveys its members, the purchasing managers for businesses around the country, each month. A reading of less than 50 indicates contraction. That figure fell to 41.9 in January from 54.4 in December.

The result stunned investors and economists, who had expected the index to drop modestly. Even as the housing and manufacturing industries have weakened in recent months, the U.S. economy has had one silver lining: the service sector, which accounts for two-thirds of the U.S. economy.

Particularly worrisome, economists said, is that the elements of the survey that forecast future activity were among those that dropped the most: New orders for supplies were down sharply, as was employment activity. Many of the businesses surveyed said they held too much inventory.

"Recession fears [are] taking hold as cost containment strategies have been dusted off from 2002," said an unnamed respondent who works in the financial sector and was cited in the report.

The weakness had spread to almost all types of non-manufacturing companies. Of 17 industries included in the survey, only three were still expanding: utilities; professional, scientific and technical services; and education.

All that points to an economy in which a broad-based corporate slowdown is underway, and it is sharper and came sooner that even bearish analysts had predicted late last year. It reinforces a report last week that the number of jobs in the United States dropped in January.

"The fissures and fractures in the economy keep widening out," said Brian Bethune, an economist at Global Insight, a consulting firm. And it is now touching the wallets of American consumers.

With their homes worth less, consumers are buying fewer goods. With retailers coping with lower sales, a variety of businesses are affected. For example, the survey indicated a softening in the transportation sector, which includes the trucking firms that deliver goods.