An ugly start for the stock market this year suggests Wall Street sees a worsening economic picture ahead as housing and credit problems spread and potentially lead to recession, analysts say.
The blue-chip Dow Jones Industrial Average tumbled 4.2 percent in the week to Friday to 12,800.18, slipping below the psychologically important level of 13,000.
The tech-dominated NASDAQ composite plunged 6.3 percent for the week to 2,504.65 and the broad-market Standard & Poor's 500 index lost 4.5 percent to 1,411.63.
The market has opened the year with a thud, with sharp losses in two of the first three trading days, pushing the blue-chip index below 13,000 as analysts downgrade their outlook for the US economy and corporate earnings.
"We enter the new year with US data that indicate the US economy is on shaky ground," said TD Bank Financial Group economist Pascal Gauthier, predicting "a significant slowdown" in consumer spending as Americans are hit by housing and credit woes.
"A mild US recession is coming," said a more emphatic Richard Berner, economist at Morgan Stanley. "We expect domestic demand to contract significantly in each of the next three quarters, essentially no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by five to 10 percent over that period."
Reinforcing those expectations was Friday's weak report on US employment, showing just 18,000 jobs created last month and the first contraction in private sector employment since 2003.
"Rising unemployment rates, slowing job growth, weakening manufacturing are signs of an economy just hanging on," said Joel Naroff of Naroff Economic Advisors.
Nigel Gault, economist at Global Insight, said the payrolls report "shows an economy slowing sharply -- the first quarter of 2008 is shaping up as a negative quarter for GDP growth -- and the risk of recession is rising sharply."
Gault and others say the US Federal Reserve, which has already cut its base federal funds rate by a full percentage point since September, will need to cut further and even that may not avoid a downturn.
Sal Guatieri, senior economist at BMO Capital Markets, said that resurgent inflation might prevent the Federal Reserve from easing interest rates even in the face of soft economic conditions.
"There's a strong whiff of stagflation -- weakening growth and rising inflation -- in the air for the first time since the oil price spike and recession of the early 1990s," he said.
Bonds showed strong gains as investors flocked to safety. The yield on the 10-year Treasury bond slid to 3.854 percent from 4.096 percent a week earlier while that on the 30-year Treasury bond slipped to 4.359 percent from 4.514 percent.
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