Investors shrug off economic news — so far

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The first half of 2002 provided ample evidence of an economy that was moving forward, alternating between baby steps and full strides toward economic recovery. Through much of this, investors were preoccupied with the accounting scandals and weak earnings that were pushing the stock market backward.

Now investors appear ready to focus, or at least be swayed, by positive economic data. This apparent change, combined with a full economic calendar over the next week, seemed to set the stage for a change in investor sentiment.

So far, the data have been somewhat disappointing, but not so much that it will alter the Federal Open Market Committee’s plans for its Aug. 13 meeting. It’s virtually assured the committee won’t change rates. But how might the latest data and upcoming events on the economic calendar impact investor sentiment?

The initial look at gross domestic product, the total value of all goods and services produced in the economy for the second quarter, showed slower-than-expected growth, clocking in at 1.1 percent. This was about half of consensus estimates.

In truth, this number is subject to at least two additional revisions, so by itself it does not carry too much weight. However, first-quarter growth was revised lower, from a 6.1 percent pace to 5 percent, and prior quarters also were revised to show sharper declines and a recession that was slightly more pronounced than originally indicated.

While there is little sense in crying over the equivalent of economic spilled milk, the fickle sentiment of investors is easily turned. Further, after months of warnings that consumer spending could falter, it is now being called into question due to a second-quarter decline in a broad category known as consumer nondurables. Presumably, not enough consumers ran out to purchase their stylish summer bathing suits or the latest sunglasses. The revelation is being greeted with “I told you so” harrumphs from those who are predicting a double-dip recession. This also comes on the heels of abundant references to the declining consumer confidence levels that paralleled a falling stock market in July.

The Institute for Supply Management’s closely watched ISM Index is an important barometer of the manufacturing industry, and is rumored to attract particular emphasis from Fed Chairman Alan Greenspan. The July release extended the streak of expansion within the sector, but came in well below expectations at 50.5 and lies perilously close to 50 — the index’s threshold between expansion and contraction.

These less-than-impressive economic reports, however, have had little affect on the broad market indexes. Perhaps investors haven’t been in a rush to judgment about the immediate economic and market future. The balance of economic releases might yet validate to many whether the economy is progressing on schedule or is hopelessly jogging in place.

The July employment report, scheduled for release Aug. 2, may not provide much in the way of good news, except that it may not provide any bad news. If estimates that the unemployment rate will hold at 5.9 percent come to fruition, this gets chalked up as a small moral victory against negative investor sentiment. Although the unemployment rate is a lagging economic indicator, telling more where the economy has been than where it is going, the last thing consumers and investors want to hear at this point is about rising joblessness.

While manufacturing indicators have taken a pounding in July, the Aug. 5 release of the ISM Services Index may itself be telling, as the economy has a greater focus on services than manufacturing. How the service sector holds up and whether investors act on that information remains to be seen. However, this may provide greater insight into the current economic state than many of the other much ballyhooed, backward-looking releases.

Finally, Aug. 9 will feature an initial look at August consumer sentiment, as measured by the University of Michigan, and a preliminary look at second-quarter productivity. It is increasing productivity in the face of economic expansion that keeps prices low and facilitates much-needed business investment. A healthy dose of productivity may not spell immediate relief to the unemployment picture, but will indicate if many businesses are better able to ramp up their investment and capital-spending levels.

Greg McBride is a financial analyst for

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