Productivity Data Hit Stocks

Concern about inflation after a surprise jump in labor costs sent stocks skidding Thursday, with unfounded rumors of a terror threat compounding the selling. The decline came despite a sharp drop in oil prices.

Gold hit a fresh 25-year high, rising $3.10 to $572.50 an ounce in New York futures trading.

In the Treasury bond market, however, yields were little changed as investors awaited today’s January employment report.

Wall Street worried that the Labor Department’s fourth-quarter productivity report, which showed a 3.5% jump in unit labor costs, was a harbinger of higher inflation, because the data meant companies were paying more for less-productive workers.

With the Federal Reserve clearly willing to keep raising interest rates to fight inflation, investors fretted about the potential economic damage of a sustained credit-tightening campaign.

Stocks took a dive early in the session after a number of floor traders said there was a rumor the Homeland Security Department would announce a new terror threat. Although the rumor proved false, the major indexes had already fallen too much to mount a rally amid ongoing worries about Iran’s nuclear research program and other geopolitical issues, analysts said.

“I think the market here is in a very nervous state,” said Peter Cardillo, strategist at S.W. Bach & Co. “You have geopolitical problems surrounding the Iranian situation heating up and you have concerns about productivity, and that’s keeping investors very cautious.”

The Dow fell 101.97 points, or 0.9%, to 10,851.98.

Broader stock indicators also fell sharply. The Standard & Poor’s 500 index slid 11.62 points, or 0.9%, to 1,270.84, and the Nasdaq composite dropped 28.99 points, or 1.2%, to 2,281.57.

Smaller stocks, which soared in January, were hit hard. The Russell 2,000 index of smaller companies lost 9.23 points, or 1.3%, to 726.25.

Losers topped winners by more than 2 to 1 on the New York Stock Exchange.

Despite the concerns over Iran, crude oil prices fell as world leaders sought to minimize the chance of substantial conflict there. A barrel of crude settled at $64.68, down $1.88, in New York futures trading.

A drop in initial jobless claims failed to spark much enthusiasm on Wall Street. The number of first-time jobless claims fell by 11,000 last week to 273,000. The four-week moving average of claims fell to its lowest level in 5 1/2 years, the Labor Department said.

The government today will report on January employment. If job creation was stronger than expected, it could raise fresh concerns about inflation, analysts said.

That could drive bond yields higher. The 10-year Treasury note yield, unchanged at 4.56% on Thursday, has jumped from 4.33% in mid-January.

As for the stock market, “You can have all the good jobs data, all the good economic data you want, but until the Fed gets out of the way there just isn’t really a whole lot of hope for [prices] to move higher,” said Joe Keating, chief investment officer at First American Asset Management.

In other market highlights:

* United Airlines’ new stock fell 10.3% from its initial valuation but the value remained more than double what the carrier had forecast, marking a successful debut on the Nasdaq Stock Market.

On the company’s first full day out of bankruptcy protection since 2002, its new shares declined $4.11 to a close of $35.89 from the $40 price established in preliminary trading this week.

* Retail stocks were mixed amid strong sales reports for January; investors had already bid many of the shares higher in recent days in anticipation of good news.

Wal-Mart Stores led the raft of retail sales announcements with a 4.7% increase in same-store sales, or sales in stores open at least a year, for its best performance since May 2004. Wal-Mart rose 14 cents to $46.28.

Rival Target added 49 cents to $55.23 after it too beat Wall Street’s sales forecasts. Ann Taylor soared $3.31 to $35.63.

* Tyco International fell $1.30 to $24.80 after it reported that quarterly profit fell 22%, partly because of one-time charges.

* General Motors dropped 90 cents to $23.60 as brokerage UBS recommended investors sell shares of the world’s biggest automaker. UBS cut the stock to “reduce” from “neutral,” saying its 26% gain this year through Wednesday was overdone.

* Starbucks jumped $3.04 to $34.40 after the coffeehouse chain boosted its 2006 earnings forecast by 5 cents, to 68 cents to 70 cents a share.