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Stocks drop as investors worry about consumers

Stocks fell sharply Friday as investors worried that nervous consumers will short-circuit the economic recovery.

Traders were disappointed by media reports that the Reuters/University of Michigan index of consumer sentiment fell sharply in the first part of this month, a sign that consumers may continue to curtail their spending as they worry about losing their jobs. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported an unexpected decline in retail sales. Investors were able to shake off that reading, but Friday's consumer sentiment number had them bailing out of stocks and moving their money to the relative safety of government bonds. Treasury prices rose sharply, pushing their yields lower.

The Labor Department said the Consumer Price Index was flat in July after a slight increase in June. Inflation is bad for bonds because it eats into their fixed returns over time.

Meanwhile, the market shrugged off a report showing a bigger-than-expected increase in industrial production. Investors have come to expect an improvement in manufacturing activity; their concern now is the consumer.

In early trading, the Dow Jones industrial average fell 137.55, or 1.5 percent, to 9,260.64. The Standard & Poor's 500 index fell 15.35, or 1.5 percent, to 997.38, while the Nasdaq composite index fell 32.47, or 1.6 percent, to 1,976.88.