The Dow Jones industrial average lost 76 points, or 0.6 percent, to 12,214 in afternoon trading. The S&P 500 fell 6, or 0.5 percent, to 1,308. The Nasdaq composite dropped 5, or 0.2 percent, to 2,763.
First-time applications for unemployment benefits, an indication of how many people are losing their jobs, fell slightly last week to 422,000. That was more than economists were expecting and well above the 375,000 level that signals that the economy is adding jobs.
"Companies are just not hiring the same number of workers that they laid off two years ago, and that's leading to a very stale jobs environment," said David Loesser, the president of the Estate Planners Group, a financial advisory firm in Washington Crossing, Pa.
Several retailers reported poor sales for May, adding to concerns that the U.S. economy is straining under higher costs for raw materials like oil and cotton. Companies that catered to middle and lower income shoppers said that higher food and gas prices cut into sales. Gap Inc. fell 2 percent after sales fell across all its brands. Target Corp. fell 1 percent after missing expectations as sales traffic slowed during the second half of the month.
Luxury retailer Saks Inc. was among the few companies in the category that rose. The company gained 1.8 percent after far surpassing analyst's expectations.
Financial companies fell, though less than the overall stock market. Goldman Sachs dropped 1.3 percent after the bank received a subpoena from the Manhattan District Attorney's office to discuss its role in the financial crisis. The subpoena follows the April release of a Senate report that showed Goldman had steered investors toward mortgage securities it knew would likely fail.
A number of recent reports have indicated that the U.S. economy may be slowing. On Wednesday, payroll processor ADP said that private employers added just 38,000 jobs in May, down from 177,000 in April. That, along with a sharply lower reading on a key manufacturing index sent the Dow Jones industrial average down 280 points. It was the worst drop in nearly a year and erased more than a quarter of the stock market's gains for 2011.
After racing to its quickest first quarter since 1998 thanks to higher corporate profits, the S&P 500 has fallen 3.8 percent over the last month. It is still up 4 percent for the year.
Many investors are now focused on Friday, when the government's monthly employment report will be released. Economists expect that the unemployment rate will remain unchanged at 8.9 percent.