Stocks Decline as Tepid Growth Combines With Fed Jitters

NEW YORK ( TheStreet) -- Major U.S. stock averages on Friday retreated after tepid industrial output and consumer sentiment reports dampened investor sentiment ahead of next week's Federal Reserve policy statement.

The S&P 500 fell 0.6% to close at 1,626.73. The Dow Jones Industrial Average slipped 0.7% to 15,070.18 while the Nasdaq lost 0.63% to 3,423.56.

"I think that fake rally of yesterday was predicated on yet another rumor about what Chairman Ben Bernanke is going to say or do next week," said Jeffrey Sica, chief investment officer of Sica Wealth Management. "We're getting profit-taking before the weekend after the rally of Thursday anticipating that maybe there could potentially be some more negative information coming out."

While many investors are sharply focused and anxious about what the Fed might reveal about future tapering plans next week, Ethan Harris, co-head of global economics research at Bank of America, said earlier this week that the U.S. central bank would really only begin to taper after strong, sustained evidence that the economy is on solid ground. But even then, the Fed wouldn't suddenly go from $85 billion of monthly bond purchases to zero.

"The Fed will make it tapering as smooth as possible," he said. "There's no rush here."

"It's not like the economy is collapsing," Harris added. "But we aren't starting to accelerate yet."

A lackluster industrial output report released before the market open showed that the U.S. remains vulnerable to weakness in the world economy. The Federal Reserve reported that industrial production was unchanged in May, vs. expectations of a 0.2% increase, after falling by an upwardly-revised 0.4% in April. A drop in utilities output was offset by a rise in mining output during the period. Capacity utilization rose to a less than expected to 77.6% from a downwardly-revised 77.7%. Economists were generally expecting a rise to 77.9% last month.

The University of Michigan Consumer Sentiment report came in less than expected at 82.7 in June; economists were expecting 84.5, the same as the prior month.

Inflation pressures appeared to remain relatively subdued in May. The Bureau of Labor Statistics reported early Friday that the producer price index gained by a greater than expected 0.5% in May after falling 0.7% in April. Economists, on average, expected the PPI to increase 0.1%. The core PPI held steady at 0.1%, as expected.

Written by Andrea Tse and Joe Deaux in New York

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