US stocks dropped on Tuesday, after a report showing slower-than-expected business growth in America's industrial heartland fanned investor concerns that the economy was faltering. Troubled insurer American International Group Inc, which said it had overstated net income for the past five years by $3.9 billion, or 10 percent, and aluminium producer Alcoa Inc weighed on the blue chip Dow average.
The Dow Jones industrial average dropped 75.07 points, or 0.71 percent, to finish at 10,467.48. The Standard & Poor's 500 Index dropped 7.28 points, or 0.61 percent, to 1,191.50. The technology-laced Nasdaq Composite Index dropped 7.51 points, or 0.36 percent, to 2,068.22.
In May, the Nasdaq jumped 7.6 percent - its largest monthly gain since October 2003. The Dow finished May up 2.7 percent and the S&P 500 advanced 3 percent.
"We're in a difficult scenario, where the economic information is clearly indicating that the soft patch is going to prevail for an extended period of time," said Ned Riley, chief executive officer of Riley Asset Management, of Boston.
The National Association of Purchasing Management-Chicago business barometer, an index of business activity in the Midwest, fell in May to 54.1, its lowest level since June 2003. The May reading was sharply below economists' forecast for a reading of 62.0 and down from April's 65.6. Since it was above 50, May's lower-than-expected number still indicated growth.
Investors appeared to discount news that US consumer confidence had improved sharply in May. The index rose to a better-than-expected 102.2 from a revised 97.5 in April, according to the Conference Board.
Consumer spending accounts for about three-quarters of the US economy, so the consumer confidence gauge is closely watched.
Michael Metz, chief investment strategist at Oppenheimer & Co, of New York, wondered how long consumers could be counted on the drive the economy.
"The savings rate is virtually zero, and how long that is sustainable is a question," he said.
AIG, which regulators have accused of improper accounting, dropped 1.5 percent, or 85 cents, to $55.55.
Alcoa fell 1.4 percent, or 37 cents, to $27.10 after it received a subpoena from a US grand jury looking into possible antitrust violations in the aluminium fluoride industry.
Computer maker International Business Machines Corp was off 2 percent, or $1.55, at $75.55. United Technologies Corp, an industrial and aerospace conglomerate, was down 1.1 percent, or $1.18, at $106.70.
Shares of Dreamworks Animation SKG Inc fell 9.1 percent after the company's latest movie, "Madagascar," missed analysts' expectations for ticket sales in its opening over the Memorial Day weekend. Dreamworks closed down $2.95 at $29.40 on the New York Stock Exchange. It was the biggest percentage loser on the NYSE.
Among gainers, shares of Northwest Airlines Corp rose 8.9 percent, or 50 cents, to $6.09 on Nasdaq after a Merrill Lynch analyst raised the rating on the company's stock to "buy" from "neutral."
Also in the airline sector, shares of bankrupt United Airlines Corp climbed 15.7 percent, or 18 cents, to $1.33 in over-the-counter trading after the company's mechanics accepted a 3.9 percent wage cut, ending a strike threat.
A federal judge on Tuesday allowed bankrupt US Airways Group Inc to consider bids in addition to the one already submitted by America West Holdings Corp.