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U.S. stocks decline on ongoing worries about economy, credit market

U.S. stocks decline on ongoing worries about economy, credit market

Stocks dropped in early trading Thursday, with Wall Street taking few chances amid concerns that shrinking credit is hurting the U.S. economy and uncertainty about the Federal Reserve's intentions.
Thursday's economic data disappointed investors. The Commerce Department said second-quarter gross domestic product rose 4.0 percent _ its fastest pace in more than a year, but a bit lower than many anticipated. The report also suggested that business investment, not consumer spending, was the main driver of growth.
And to Wall Street's surprise, the Labor Department said U.S. jobless claims rose last week to the highest level since April. Any signs of weakness in employment, one of the stronger pillars of the economy right now, raises concerns that problems in the housing market are spreading further.
The Dow Jones industrials gained nearly 250 points Wednesday after losing about 280 points in the prior session, as investors grew more optimistic about the chance of an interest rate cut and sought out bargains. Fed Chairman Ben Bernanke, expected to speak in Wyoming on Friday, said in a letter to Sen. Charles Schumer that Fed policymakers are "prepared to act as needed" if the market's turmoil damages the economy.
But the Fed's objectives are not yet clear, and so with investors wanting to collect some of their gains from Wednesday ahead of Labor Day weekend, Wall Street pulled back again. Worse-than-expected quarterly earnings reports from Freddie Mac and H&R Block Inc., who both pointed to troubles in mortgage lending, also triggered selling.
In early trading, the Dow fell 79.82, or 0.60 percent, to 13,209.47.
Broader stock indicators also fell. The Standard & Poor's 500 index dropped 8.98, or 0.61 percent, to 1,454.78, and the Nasdaq composite index slipped 11.98, or 0.47 percent, to 2,551.18.
Bond prices rose as stocks declined. The yield on the 10-year Treasury note, which moves inversely to its price, fell to 4.52 percent from 4.56 percent late Wednesday.
The credit markets haven't completely sealed up, but bonds issued by companies are seeing much less demand than bonds issued by the government. In the week ended Tuesday, money market mutual fund investors drew cash out of prime funds _ some of which invest in commercial paper _ and instead padded their government fund assets, according to iMoneyNet Inc.
A big reason behind the credit tightening has been defaults and delinquencies in subprime loans, which have led to losses for lenders and those who invested in mortgage-backed assets.
Government-sponsored Freddie Mac, the second-largest U.S. buyer and guarantor of home mortgages, said its second-quarter profit dropped 45 percent, after it recorded larger provisions on its books for bad loans.
And H&R Block Inc. reported that its first-quarter loss was bigger than during the same period last year, as it struggled with its mortgage lending arm.
The Russell 2000 index of smaller companies fell 4.20, or 0.53 percent, to 783.12.