Cost-cutting and the lure of the iPhone softened the effect of the weak economy at AT&T Inc., helping the country's biggest telecommunications carrier beat analyst estimates for the first quarter.

AT&T said Wednesday it earned more than $3.1 billion, or 53 cents per share, in the first three months of 2009, down 9.7 percent from almost $3.5 billion, or 57 cents per share, a year earlier.

The earnings were reduced by 5 cents per share for increases in noncash pension and retiree expenses. Excluding that item, the earnings were 58 cents per share. The average estimate of analysts polled by Thomson Reuters, which generally excludes items, was for earnings of 48 cents per share.

Despite strong wireless sales, AT&T says revenue slipped to $30.6 billion from $30.7 billion a year ago. That was short of analyst expectations at $31.1 billion.

Revenue fell because the weak economy exacerbated the long-running decline of AT&T's landline business. Sales of traditional fixed phone service fell 12.2 percent to $8.7 billion.

AT&T shares rose 32 cents, or 1.3 percent, to $25.60 in morning trading.

Even as revenue declined, AT&T improved its overall profit margin slightly, helped by the continuing process of integrating BellSouth Corp., which it bought in 2006. It has also reduced its work force by 8,000 people since the beginning of the year, mainly by cutting jobs on the wired side of the business. It had 294,600 employees at the end of the quarter.

AT&T added a net 875,000 customers under contract in the first three months of the year, hundreds of thousands more than expected by analysts. Of the new customers, about three-quarters chose the iPhone, for which AT&T is the exclusive U.S. carrier.

The iPhone has been a drag on AT&T's earnings since last summer, when the latest model, the "3G," launched. AT&T has been subsidizing each phone by hundreds of dollars, with the aim of making its money back on service fees, since iPhone users pay 60 percent more per month than other customers.

That strategy started to pay off in the first quarter. Margins in the wireless business are now back almost to where they were before the launch of the iPhone 3G, despite the sale of 1.6 million iPhones in the quarter. The sales figure includes customers switching from other AT&T phones. Sales were down from 1.9 million from the fourth quarter, but were strong for a non-holiday quarter without a new iPhone model.

Apple Inc.'s phone also helped AT&T avoid getting caught up in a trend analysts are expecting to see this year: more customers signing up for prepaid service than for expensive contract-based plans. Only a quarter of new subscribers at AT&T chose prepaid in the quarter, compared to more than half at T-Mobile USA.

Two segments of AT&T's landline business also did well. Its cable-like TV service, U-Verse, signed up 284,000 subscribers, for a total of 1.3 million. It added 359,000 subscribers to wired broadband, a performance that bucks years of declining numbers in a saturating market.

BlackBerry maker's shares fall 14.5% on weak fourth-quarter forecast.

Stocks fell sharply Wednesday, as a handful of bleak profit outlooks and more evidence of escalating unemployment served as stark reminders that the economy remains in rough shape. The Dow Jones industrials dropped more than 180 points.

Underscoring investors' growing fears that 2009 is shaping up to be a difficult year for many sectors, Time Warner and Intel on Wednesday issued disappointing guidance.

Time Warner Inc. said it expects to record a fourth-quarter $25 billion impairment charge for its cable, publishing and AOL units that will lead to an operating loss for the period and a loss for the full year. It had expected a profit between $1.04 and $1.07 per share for the year.

Meanwhile, computer chip maker Intel Corp. said it expects fourth-quarter revenue to drop 23 percent, below prior estimates, due to weak demand and inventory reductions by its computer maker customers.

Time Warner shares shed 97 cents, or 8.8 percent, to $10.01. Intel shares plunged nearly 6 percent, or 88 cents to $14.49.

Aluminum producer Alcoa Inc.'s decision to slash jobs further jolted investors.

Alcoa said late Tuesday it is reducing its global work force by about 13,500, or 13 percent, by the end of the year and lowering total output by more than 18 percent annually. Shares of Pittsburgh-based Alcoa tumbled 70 cents, or 5.8 percent, to $11.42.

The announcement comes ahead of the Labor Department's report Friday on the job market - a closely watched barometer of the economy's health. The market got a disappointing harbinger Wednesday in the form of the ADP National Employment Report, an unofficial gauge that the market has been increasingly monitoring as U.S. job losses mount. The report said private sector employment fell by 693,000 in December, worse than expected.

When people lose their jobs, they tend to spend less and fall behind on their debt payments. Investors fear that further declines in consumer spending will prolong the recession.

"People are concerned with the employment report coming out on Friday," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. "The market has shrugged off some bad news recently, and it's starting to get to the point where it can't do that anymore."

The Dow has rallied about 20 percent since its multiyear lows in late November 2008, and the Standard & Poor's 500 index has surged nearly 25 percent.

"We've had a big move," Fullman said. "What we're looking at now is just people getting a little cautious here."

In late morning trading, the Dow dropped 186.46, or 2.07 percent, to 8,828.64. The Standard & Poor's 500 index fell 21.57, or 2.31 percent, to 913.13, while the Nasdaq composite index fell 41.70, or 2.52 percent, to 1,610.68.

The Russell 2000 index of smaller companies was down 14.98, or 2.91 percent, to 499.73.

Declining issues outnumbered advancers by about 6 to 1 on the New York Stock Exchange, where volume came to 297.50 million shares.

On Tuesday, Wall Street overcame gloomy economic readings to finish with a moderate advance. The market's economic worries had been calmed a bit in recent days by President-elect Barack Obama's proposal to slash taxes and help businesses. The stimulus package could cost as much as $775 billion, though, and Obama said Tuesday the nation could face trillion-dollar deficits "for years to come."

Bond prices rose on Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.46 percent from 2.47 percent late Tuesday. The yield on the three-month T-bill, considered one of the safest investments, edged lower to 0.11 percent from 0.14 percent.

The Treasury plans to auction a record $30 billion in three-year notes on Wednesday.

The dollar fell against other major currencies. Gold prices also fell.

Crude oil prices slipped $2.46 to $46.12 a barrel on the New York Mercantile Exchange.

In Asian trading, Japan's Nikkei stock average rose 1.74 percent, and Hong Kong's Hang Seng index fell 3.37 percent. In afternoon trading in Europe, Britain's FTSE 100 fell 2.31 percent, Germany's DAX index fell 1.37 percent, and France's CAC-40 fell 1.14 percent.

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Mortgage rates are falling as this week's dramatic action by the Federal Reserve provides a boost to the dismal housing market, but the nation's unemployment rolls are stuck at historically high levels amid a deepening recession.

Mortgage giant Freddie Mac (nyse: FRE - news - people ) on Thursday reported that rates had fallen to the lowest level on records dating back to 1971. Average rates on 30-year fixed-rate mortgages dropped to 5.19 percent, down from the year's previous low of 5.47 percent, set last week.

Jobs data from the government, while better than expected, was still sobering. The Labor Department on Thursday said its tally of initial jobless benefit claims fell to a seasonally adjusted 554,000 from an upwardly revised figure of 575,000 the previous week. The new tally was slightly below economists' expectations of 558,000 claims.

Another slight improvement was seen in the number of people who continue to receive jobless benefits, which declined to 4.38 million from 4.43 million the previous week. Economists expected a slight increase to 4.45 million.

Still, claims remain near the highest level since 1982, though the labor force has grown by about half since then.

And the cuts continue. Water treatment and storage systems maker Pentair Inc. (nyse: PNR - news - people ) said Thursday that it will cut more than 10 percent of its work force, or about 1,600 jobs, due to a faster-than-expected drop-off in demand and consumer spending. One day earlier, hard drive maker Western Digital Corp. (nyse: WDC - news - people ), managed-care company Aetna Inc. (nyse: AET - news - people ), and Newell Rubbermaid Inc. (nyse: NWL - news - people ), maker of products including Rubbermaid storage containers and Sharpie pens, announced mass job cuts.

Meanwhile, President-elect Barack Obama is laying the groundwork for a giant economic stimulus package, worth possibly $850 billion over two years, which Democratic congressional leaders say could be passed within two weeks of Obama taking office.

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December got off to a rough start for equities in general, with the Standard & Poor's 500-stock index down nearly 9%, to 816, on the first day of the month. But wireless carrier Sprint Nextel (S) saw its stock hammered much more than any of the major averages, with shares down 24%, to 2.11.

Why the drubbing? The only news Sprint announced for the day appeared to be relatively benign. The company said it had finalized a previously announced deal to combine its next-generation wireless broadband business with Clearwire (CLWRD), a Kirkland (Wash.) company that's building its own wireless broadband business. By combining the two operations, the companies figure they'll be able to roll out service faster and save on expenses in the process. In addition to Sprint's contribution of assets, Clearwire received $3.2 billion in funding from a number of backers, including Intel (INTC), Google (GOOG), Comcast (CMCSA), and Time Warner Cable (TWC).

Trouble is, that may not be enough money. When the Sprint-Clearwire transaction was originally announced back in May, Clearwire expected to be able to offer its service to 120 million to 140 million people by the end of 2010. But the buildout plans assumed that, in late 2009 or in early 2010, Clearwire would be able to raise an additional $2 billion to $2.3 billion. With the capital markets virtually closed, Clearwire may not be able to raise that money and its rollout schedule may have to be modified. "My preference would be that we continue moving along at the same pace, but that we look at the capital markets on a quarter-by-quarter basis," says Benjamin Wolff, chief executive of Clearwire. Wolff says Clearwire's board could decide to change its buildout schedule when it convenes in early 2009.

Network Access Denied?

Any slowdown by Clearwire could cause Sprint problems. As a Clearwire investor and customer, Sprint plans to buy access to Clearwire's network at wholesale prices and then resell the broadband Internet service to its own customers. If Clearwire's board decides to scale back its ambitions, Sprint may have to wait longer than anticipated to gain access to a high-speed network. (Sprint has two of the 13 seats on Clearwire's board.) That could slow down Sprint's ability to attract new broadband subscribers. Meanwhile, rivals like Verizon Wireless could launch their high-speed networks around 2010.

A Sprint spokesman says the company would "not discuss movements in our stock." He referred questions about the pace of Clearwire's buildout to the Kirkland company.

It's just one of the many challenges Sprint is facing. The company, once renowned for high-quality service, has suffered setbacks in customer service and other quality issues since its merger with Nextel in 2005 (BusinessWeek, 2/21/08). Customers have defected and losses have piled up. The company's stock has fallen from nearly 16 a share last year, a drop of 85%. And Standard & Poor's (which like BusinessWeek is owned by The McGraw-Hill Companies (MHP)) cut the credit rating for Sprint to below investment grade back in May.

Investors uneasy about the holiday shopping season gave back some of Wall Street's recent gains Monday, sending the Dow Jones industrial average down more than 360 points.

While initial reports about the start of holiday shopping this weekend suggested sales were better than some retailers and analysts expected, Americans are clearly extremely cautious. That has Wall Street concerned about the impact of a continuing drop in consumer spending on the economy.

According to preliminary figures released by RCT ShopperTrak, a research firm that tracks total retail sales at more than 50,000 outlets, sales rose 3 percent to $10.6 billion on Black Friday - the day after Thanksgiving that is traditionally one of the biggest shopping days of the year. But some analysts are concerned that Black Friday's results aren't indicative of the rest of the weekend.

"After a slow start to November, we believe strength on Black Friday was not enough to save the month," said John Morris, an analyst at Wachovia Capital Markets. "The strength did not carry through the remainder of the weekend, as business fell off sharply on Saturday, according to our field team."

RCT ShopperTrak is expected to release data for the combined Friday and Saturday period on Monday.

Wall Street is concerned that consumers, by curtailing their spending further, won't be able to help lift the economy from its slump.

Meanwhile, a pair of downbeat economic reports did little to alleviate investors' concerns. The Institute for Supply Management, a trade group of purchasing executives, said its index of manufacturing activity fell to a 26-year low in November. At the same time, the Commerce Department said construction spending fell by a larger-than-expected amount in October.

Both the housing and manufacturing sectors have been suffering for some time, so the reports were ultimately unsurprising. Still, they served as further evidence that the economy remains under pressure.

Some stock selling was to be expected Monday considering the magnitude of last week's advance, when stocks posted some of their steepest gains in decades. The Dow has gained 16.9 percent and the S&P 500 index 19.1 percent since a rally that began Nov. 21; it was the first five-day string of gains for both the Dow and the S&P 500 since July 2007.

In midmorning trading, the Dow Jones industrial average fell 365.66, or 4.14 percent, to 8,463.38. Standard & Poor's 500 index dropped 42.36, or 4.73 percent, to 853.88, while the Nasdaq composite index fell 69.64, or 4.54 percent, to 1,465.93.

Sales of new homes fell in October to the lowest point in nearly 18 years while the median price of a new home dropped to the lowest level since 2004.

The Commerce Department reported Wednesday that new home sales decreased 5.3 percent last month to a seasonally adjusted annual sales pace of 433,000 homes, the lowest level since January 1991, another period when the country was undergoing a steep housing downturn.

The median price of a new home sold in October fell to $218,000, down 7 percent from a year ago. It was the lowest median sales price since September 2004.

The drop in new home sales was bigger than analysts had expected and left sales 40.1 percent below where they were a year ago.

The bad news on new home sales follows other reports this week that paint a bleak picture of the housing industry.

On Tuesday, a report on home prices and downbeat earnings results from homebuilder D.R. Horton showed further deterioration in the housing market. The Standard & Poor's/Case-Shiller U.S. National Home Price Index said home prices tumbled a record 16.6 percent during the third quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

Fort Worth, Tex.-based D.R. Horton Inc. reported a nearly $800 million loss in its fiscal fourth quarter on slower home sales and more than $1 billion in charges.

A report Monday showed sales of existing homes fell a bigger-than-expected 3.1 percent in October to an annual rate of 4.98 million units. The median or midpoint price for existing homes plunged to $183,000, down 11.3 percent from a year ago.

The disappointing performance for both new and existing homes showed that the country is still in the grips of a severe housing downturn.

The problems in housing have sent shockwaves through the entire economy as mounting mortgage foreclosures have cost banks billions of dollars in loan losses, creating the worst financial crisis to hit the country in seven decades.

President-elect Barack Obama has said Congress should begin working on a sizable stimulus program even before he is sworn in on Jan. 20, with the goal of creating 2.5 million jobs over the next two years to keep the economy from falling into a prolonged recession. The housing industry also is appealing for help from the new administration.

The report on new home sales showed sales were down 18 percent in the West and 6 percent in the South.

Sales posted a 22.6 percent increase in the Northeast and were up 6 percent in the Midwest.

The drop in sales pushed the inventory of unsold homes up to 11.1 months, meaning it would take that long to exhaust the stock of unsold homes at the October sales pace.

Builders, who have been slashing production in an effort to get control of inventories, are being faced with soaring mortgage defaults which are dumping more unsold homes on an already glutted market.

The National Association of Home Builders reported last week that its survey of builder confidence fell to an all-time low of 9 in November, down from 14 last month. Index readings higher than 50 indicate positive sentiment about the market. But the trade group's index has drifted below 50 since May 2006 and below 20 since April.

The housing slump already has cost the country 3 million jobs in construction and related industries, and the home builders are urging Congress to help with increased support for the industry.

Tighter lending standards, rising defaults and fear about the housing market's future have sidelined buyers, an absence felt acutely by homebuilders such as Pulte Homes Inc. and Centex Corp.

Shares of Borders Group Inc. plunged Friday after its top competitor reported disappointing third-quarter results, setting a dark stage for Borders to report its results next week.

Shares of Borders fell 26 cents, or 19 percent, to $1.11 Friday. Earlier in trading shares reached 72 cents, their lowest point ever.

Booksellers have been struggling more recently as consumers limit their spending on discretionary items such as books and music. They also face increased competition from discounters such as Wal-Mart and Target and online sellers such as Amazon.com.

Although Borders has been in a turnaround, it has been unable to find a buyer for the bulk of its business.

And its larger competitor Barnes & Noble reported a larger-than-anticipated loss Thursday, which doesn't bode well for Ann Arbor, Mich.-based Borders. The company is expected to report its third-quarter results Tuesday after the market closes.

Analysts surveyed by Thomson Reuters expect Borders to post a loss of 50 cents per share, on average, on revenue of $726.5 million. That compares with a loss of $161.1 million, or $2.74 per share, on revenue of $813.6 million in the year-ago quarter. The loss from continuing operations was 66 cents per share.

Standard & Poor's Equity Research reiterated its "Hold" recommendation on Borders but widened its per-share loss estimated to 60 cents from 45 cents, based on drops in traffic and increased promotion activity that could hurt margins.

S&P analyst Michael Souers said the trend is likely to continue and lowered his profit estimates for fiscal 2009 and 2010 and cut his target price to $1 from $7.