Another report on Thursday showed consumer spending was
slightly stronger than expected in the April-June period, causing the
government to revise its second-quarter growth estimate up to a 1.7 percent
annualized pace from 1.6 percent.
Although the reports further diminished fears of a new
economic downturn, analysts said they were not enough to prevent the Federal
Reserve from embarking on a new round of monetary easing as early as November.
William Larkin, portfolio manager at Cabot Money Management
in Salem, Massachusetts, said the US central bank would need to see greater
stability in both the jobs and housing markets to stay on the sidelines. When
that happens, he said, "You can't say you are worried about
deflation."
Stocks on Wall Street rose on the reports, with the Dow
Jones industrial average and the Standard & Poor's 500 Index briefly rising
more than 1 percent before turning negative as investors locked in profits from
September's strong rally.
Prices for safe-haven government debt fell, while the dollar
cut losses against the euro and the yen.
Initial claims for state unemployment benefits fell 16,000
last week to 453,000, the Labor Department said, exceeding market expectations
for a decline to 460,000.
Separately, the Institute for Supply Management-Chicago's business
barometer rose to 60.4 this month from 56.7 in August, showing manufacturing in
the Midwest perking up.
Markets had expected a reading of 55.9 for the index, which
is seen as closely correlated with national trends. A reading above 50
indicates expansion in the regional economy.
The employment component of the index sank to its lowest
since May, but new orders rose strongly.
"It's encouraging to see that jobless claims are
trending lower now. And also it looks like the US economy entered the third quarter
with a little bit more momentum than previously expected," said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The economy slowed down in the second quarter after a 3.7
percent growth pace in the first three months of the year, leaving the recovery
from the longest and deepest downturn since the Great Depression with little
strength to chip away at a 9.6 percent unemployment rate.
Worried about the slow growth pace and low inflation, the
Fed last week signaled it was ready to inject more money into the economy.
The Fed's preferred measure of inflation — the personal
consumption expenditures price index, excluding food and energy — rose at a
slow 1.0 percent in the second quarter, a slight downward revision from the 1.1
percent increase the government had estimated last month.
But there were some encouraging signs on consumer spending,
which accounts for over two-thirds of US economic activity.
Second-quarter spending was revised up to a 2.2 percent
growth rate, the largest increase in three years, from the previously reported
2.0 percent rise. Spending grew at a 1.9 percent rate in the January-March
period.
Growth was also supported by a bigger accumulation in
business inventories than previously thought.
But a 33.5 percent jump in imports, which was previously
reported as a 32.4 percent increase, kept growth on a weak trajectory. Analysts
believe the surge in imports was likely the result of Chinese exporters rushing
to push through goods before the expiration of value added tax rebates.
The import surge, the biggest in 26 years, handily eclipsed
a 9.1 percent rise in exports, creating a trade deficit that chopped 3.5
percentage points from GDP growth.
Analysts do not expect the robust import growth pace to
continue, which means trade will be less of a drag on the economy in the third
quarter.
Business investment was revised a touch lower, to reflect
weak spending on structures, but remained the largest advance since the first
quarter of 2006.
The GDP report also showed after tax corporate profits rose
3.9 percent in the second quarter, revised up from 2.9 percent. Profits had
increased 5.8 percent in the first quarter.
