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updated: 9/1/2011 2:23 PM

Economy shows signs of moving past August shocks

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  • Assembly line worker Edward Houie moves a door into position for a Chevrolet Volt at the General Motors Hamtramck Assembly plant in Hamtramck, Mich. Factory orders rose in July, helped by increased demand for autos and commercial aircraft.

      Assembly line worker Edward Houie moves a door into position for a Chevrolet Volt at the General Motors Hamtramck Assembly plant in Hamtramck, Mich. Factory orders rose in July, helped by increased demand for autos and commercial aircraft.
    ASSOCIATED PRESS

 
Associated Press

WASHINGTON -- U.S. consumers and businesses are not so worried that the economy is about to tumble into a recession after all.

Manufacturing grew a little slower in August than the previous month, but it didn't contract as some had feared. Shoppers spent more at retail stores during the crucial back-to-school season. And fewer people applied for unemployment benefits last week, a sign that layoffs have slowed.

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Thursday's reports hardly suggest the economy is strong. They mostly point to weak growth.

But the data were better than most economists had expected. And after a month in which stocks had plunged and many feared another downturn was looming, even marginally positive news was a welcome sign.

"There is no recession," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ, in a note to clients. Despite the sharp drop in financial markets in early August, "nothing has happened to the real economy," he said.

Stocks were mostly flat. Many investors are likely waiting to see Friday's report on job growth and unemployment in August. The government's monthly employment report is the most important indicator of business confidence, particularly during uncertain economic times.

Manufacturing grew last month for the 25th straight month, although at the slowest pace in two years, according to the Institute for Supply Management. The private trade group said its index of manufacturing activity slipped to 50.6 last month, down slightly from a reading of 50.9 in July.

Still, economists were expecting a number below 50, the level that separates growth from contraction.

Orders contracted, though at a slower pace than the previous month. Production shrank for the first time in 26 months. Measures of exports and employment showed that those categories expanded, but at a slower pace.

"To call this a relief is something of an understatement," said Ian Shepherdson, an economist at High Frequency Economics. "It could have been horrendous."

Weekly applications for unemployment benefits fell 12,000 to a seasonally adjusted 409,000 last week, the Labor Department said. Striking Verizon workers drove applications higher in the previous two weeks. The strike ended last week and is no longer inflating application totals.

Applications have come down steadily from an eight-month high of 478,000 in April. Still, they typically need to drop below 375,000 to signal sustainable job growth. They haven't been at that level since February.

The downward trend suggests employers aren't stepping up layoffs amid renewed concerns about the economy's health.

Consumers kept shopping in August, despite the drop in stock prices. Target Corp., Macy's Inc., teen retailer Wet Seal Inc. and warehouse club operator Costco Wholesale Corp. posted sales gains that beat Wall Street expectations. Luxury chains such as Nordstrom Inc. and Saks also fared well.

Consumer spending accounts for 70 percent of economic activity.

Worker productivity fell this spring more quickly than previously estimated. Still, the drop could be a good sign if it means that companies have pushed their current work forces as far as they can and will have to step up hiring to meet demand.

One concern is that builders cut back sharply on construction projects in July. A decline in government projects was partly to blame. The pace of construction spending is barely above an 11-year low hit in March and only about half the $1.5 trillion that economists view as a healthy. Economists believe it could take four years before construction activity returns to more normal levels.

The economy expanded at an annual rate of just 0.7 percent in the first half of the year, the weakest six months of growth since the recession officially ended. That added to concerns last month that the anemic economy was vulnerable to shocks and could fall into recession.

But economists expect growth will come in a bit better in the second half of this year, at about a 2 percent annual pace.

Earlier data shows the economy is off to a better start in the July-September quarter. Employers added 117,000 net jobs in July, about double the pace of the previous two months.

Consumer spending rose that month by the most in five months, partly because Americans bought more cars and spent more to cool their homes. And businesses ordered more goods from factories, particularly autos and airplanes, the Commerce Department said Wednesday

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