The Labor Department said more people applied for unemployment benefits last week, the first increase in three weeks. The number of people seeking benefits rose by 10,000 to 424,000, more than analysts were expecting.
Applications are above the 375,000 level that indicates sustainable job growth. Applications peaked at 659,000 during the recession. Employers stepped up hiring this spring, but some economists worry that rising applications indicate a slowdown in hiring.
The Commerce Department said the economy grew at a sluggish 1.8 percent in the January-March quarter as surging gasoline prices and sharp cutbacks in government spending overshadowed strong corporate earnings. Consumer spending grew at just half the rate of the previous quarter, and less than previously estimated. A surge in imports widened the U.S. trade deficit.
In early trading, the Dow Jones industrial average fell 68 points, or 0.6 percent, to 12,326. The Standard & Poor's 500 fell 5, or 0.4 percent, to 1,315. The Nasdaq composite dropped 4, or 0.1 percent, to 2,759.
The weak economic news drew investors toward safer assets, pushing the yield on the 10-year Treasury note to 3.08 percent, its lowest level this year. It was trading at 3.15 percent shortly before the economic reports came out. Bond yields fall when their prices rise.
Economists believe the economy is doing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices near $4 a gallon and uncertainty about Europe's debt crisis.
Fears about Europe's debt crisis flared again Thursday morning, weakening the euro against the dollar. The euro lost four cents against the dollar, to $1.41 from $1.45
Concerns about the European debt crisis have caused the market to wobble in recent weeks. Stocks fell for three days before Wednesday's gains, which came as higher oil prices lifted energy stocks.
Greece's government and opposition party have failed to reach agreement on how to pare the country's debts, adding to the uncertainty surrounding Greece's financial future. Many analysts believe Greece will eventually have to restructure its debt, possibly by extending interest payments or lowering interest rates
Without that restructuring, Greece might default. That would cause a domino effect, raising borrowing rates for larger European countries and hampering the world economy.
Stocks had been climbing steadily since last August until March, when the Japanese earthquake and tsunami disaster shook global financial markets. Strong corporate earnings sent stocks back up in April, but markets have stalled in the past three weeks. The S&P 500 closed at 1,363 on April 29, its highest level of the year, and has been drifting lower ever since.
The Dow is still up 6.5 percent this year. The market has weathered revolutions in the Arab world, attempts by China and other emerging markets to slow growth and the nuclear crisis in Japan. Now that the U.S. corporate earnings season is over, traders are looking closely at the country's economic fundamentals.
Computer Sciences Corp. fell 14 percent, the most in the S&P 500, after the government contractor reported disappointing results and a weak earnings forecast late Wednesday. CSC also announced that its audit committee has started an investigation into accounting issues, some of which are being investigated by the Securities and Exchange Commission.
Tiffany & Co. led the S&P, adding 9 percent, after the company said its income rose 25 percent on higher revenue across all regions. The results easily beat analysts' expectations. The jewelry maker also raised its forecast for the year above current Wall Street estimates.