Stocks were down sharply Friday after a reading on Midwest manufacturing came in at its lowest level in more than six years and a survey showed consumer confidence at its lowest in 16 years.
The National Association of Purchasing Managers-Chicago reported its index of regional business conditions, fell to 44.5, the lowest since December 2001, from 51.5. Economists had expected a less sever slide to 49.7.
The report's subindexes were mixed, but "employment plunged catastrophically" to 33.5 from 47, notes Ian Shepherdson, chief U.S. economist at High Frequency Economics. Combined with other weak regional reports, including Philadelphia New York and Cincinnati, Shepherdson said, "We now expect the economy to shrink in the second quarter ... the only factor preventing another drop in the third quarter is the tax rebates."
The regional reports are seen as a precursor to a national reading on manufacturing, due out on Monday.
Meanwhile, the University of Michigan said its gauge of consumer confidence came in at 70.8 in a final February reading, up from a midmonth reading of 69.6, but down from 78.4 in January. It was the lowest reading since February 1992.
Before the opening bell, a report from the Commerce Department showed consumer spending has idled.
Personal spending increased 0.4 percent as income rose 0.3 percent, the Commerce Department said. Economists had expected both gauges to rise a more modest 0.2 percent. Some of the gain was due to inflation, as the personal consumption expenditure price index climbed 0.4 percent. Real spending, which is factored into GDP, was actually unchanged in January; it's been unchanged in three of the past four months.
Dell also talked about the pinch of the consumer pullback in its earnings report. The computer maker posted a lower-than-expected quarterly profit and warned that consumers may reduce spending. The company said it was making efforts to improve profitability by shedding jobs and shaking up its business.
Still, Friedman, Billings, Ramsey & Co. upgraded its rating on Dell to "outperform" from "market perform," saying it expects margins to improve and that emerging-markets growth should remain strong.
The market may have taken a break from gloom and doom in a runup earlier this week, but a slew of news from the financial sector -- everything from disappointing earnings from AIG to a snag in the bailout of Ambac -- were a quick reminder Friday.
American Insurance Group, the Dow's biggest decliner, joined the ranks of the biggest losers of the credit crunch, posting a $5.29 billion loss amid writedowns and losses of nearly $15 billion. AIG's CEO said the company expected the housing market to stay weak and credit uncertainties to persist.
UBS said Friday that losses from the global credit market crisis will likely top $600 billion -- more than triple what's been reported so far -- with banks and brokers responsible for more than half of that.
Punk Ziegel lowered its earnings estimates for the first quarter and full year on several financial institutions, including Goldman Sachs , Merrill Lynch and Citigroup , to reflect higher loan losses underpinned by the weaker economy.
Meanwhile, the bailout plan for Ambac ran into trouble when regulators demanded that banks involved move put up more capital, CNBC has learned. Confidence remains that the deal will still happen and talks are expected to continue over the weekend.
Billionaire investor Wilbur Ross told CNBC that he agreed to buy up to $1 billion in shares of bond insurer Assured Guaranty . The purchase, done through WL Ross & Co, gives Assured a much-needed capital boost to preserve its triple-A credit rating.
Some good news on the earnings front came from media company Viacom , the owner of MTV, which reported a 16 percent gain in fourth-quarter earnings and said its advertising business had not been hurt by the economic slowdown.
But in the housing sector the outlook was still bleak, as mortgage rates continued to rise. A survey by Freddie Mac showed that 30-year mortgage rates averaged 6.24 percent compared to 6.04 percent a week earlier, while 15-year mortgages increased to an average of 5.72 percent from 5.64 percent.
Slamming a plan to bring relief to mortgage borrowers, U.S. Treasury Secretary Henry Paulson said homeowners who could afford their mortgage should honor their obligations and that the Bush administration had no interest in bailing out housing speculators.