Drop in oil prices
fails to rally market

NEW YORK >> An unsettling report on consumer incomes set off a spate of profit-taking on Wall Street yesterday as investors worried that a tepid economy would erode companies' third-quarter earnings. Another drop in oil prices failed to shake the gloom from the market.

While investors were cheered by the Commerce Department's report of a strong rise in consumer spending for July, nearly flat growth in personal incomes and a handful of profit warnings for the third quarter made investors nervous. The news prompted them to cash in their gains following two weeks of advances.

"There's not a lot of resistance here, and you're seeing a little bit of profit taking," said Todd Leone, managing director of equity trading at SG Cowen Securities. "Trading lower is the path of least resistance."

Trading volume was again extremely light as many on Wall Street refused to make large moves until the Republican National Convention concluded without incident. Many investors also awaited the government's August employment report due Friday, hoping for signs that the economy was emerging from a sluggish summer.

The Dow Jones industrial average fell 72.49, or 0.7 percent, to 10,122.52.

Broader stock indicators were moderately lower. The Standard & Poor's 500 index was down 8.62, or 0.8 percent, at 1,099.15, and the Nasdaq composite index dropped 25.60, or 1.4 percent, to 1,836.49.

The Commerce Department said consumer spending rose 0.8 percent in July, better than the 0.7 percent growth economists had expected and more than making up for the 0.2 percent drop in June. But despite the increase in spending, Americans' incomes rose by only 0.1 percent in July, far less than the 0.5 percent forecast by economists and down from a 0.2 percent rise in June.

While consumer spending bodes well for short-term economic growth, the anemic rise in incomes cast a pall over longer term prospects, since rising income is key in overcoming inflation in consumer costs. Moreover, Americans are less likely to spend freely if they're concerned about the size of their paychecks.

Rising consumer prices have been exacerbated this summer by high energy costs, but the trend appears to be changing, at least in the short-term. Oil prices fell sharply yesterday even as Iraqi officials said the country's output would be halted for a week due to insurgent attacks on pipelines. The October contract for a barrel of light crude was quoted at $42.28, down 90 cents, on the New York Mercantile Exchange.

"Oil has certainly come down a lot, but it's still not low by any means," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group. "We still have terrorism worries with the RNC under way."