Stocks Gain on Retail Sales, Jobless Claims

Reports issued Thursday eased fears about consumer spending and the labor market. Economists remain divided about whether the Fed will cut rates

by David Bogoslaw

U.S. stock indexes finished higher on Thursday as optimism about an assortment of better-than-expected economic data and stronger August retail sales figures won out over jitters about record-high foreclosure filings and doubts about a Fed rate cut on Sept. 18.

Sales in stores open at least one year were better than expected for 64% of retailers thanks mostly to a calendar shift in back-to-school buying. Saks Inc. (SKS) was a particular standout, posting an 18% jump in same-store sales in August. Jobless claims for the week ended Aug. 31 fell by 19,000 to 318,000. The reports helped allay fears that consumers would retreat amid concerns that upheaval in financial markets could spread to the broader economy and cause a recession.

The Dow Jones industrial average ended 57.88 points, or 0.44%, higher at 13,363.35 on Thursday. The broader S&P 500 rose 6.26 points, or 0.43%, to 1,478.55. The tech-heavy Nasdaq composite index climbed 8.37 points, or 0.32%, to 2,614.32.

The Institute for Supply Management's non-manufacturing index was 55.8 in August, unchanged from July and better than the 55.0 reading that had been expected. The key contributor was a jump in new orders to 57.0 from 52.8, while the prices index slipped to 58.6 from 61.3. The employment component was a cause for concern, dropping from 51.5 to 47.9, the lowest reading since December, 2002, and possibly a harbinger of negative news in Friday's payrolls report, Action Economics said.

The Mortgage Bankers Association reported a slight uptick in foreclosure filings to 0.65% of all mortgage loans outstanding on a seasonally adjusted basis in the second quarter, up seven basis points from the first quarter and 22 basis points higher than a year ago. This quarter’s foreclosure starts rate is the highest in the history of the MBA's National Delinquency Survey, with the previous high being last quarter’s rate. Excluding California, Nevada, Florida and Arizona, however, new foreclosure filings were down across the U.S.

Delinquent mortgage payments on one-to-four-unit residential properties rose 28 basis points to a seasonally adjusted 5.12% in the second quarter and were up 73 basis points from a year ago.

While the retail sales and service-sector activity data lifted stocks, they detracted from the body of evidence the Federal Reserve will be able to use to justify an interest rate cut. The sales numbers could be taken as confirmation of Wednesday's Beige Book information, which showed limited spillover of the credit mess into other areas of the economy.

Economists remain divided on whether the signs of economic distress seen thus far will be enough to persuade the Fed to lower the Fed funds rate at its September policy meeting. More intriguing, in some cases their views have little to do with their personal takes on the prospects for a recession. If he didn't plan to ease rates, Fed Chairman Ben Bernanke would surely have said something at last week's Jackson Hole, Wyo., conference to cue the market to start discounting a rate cut, contends Thomas Higgins, chief economist at Payden & Rygel, a research firm in Los Angeles.

"I very highly doubt that a man who has managed expectations so well thus far in his tenure would surprise the market now," Higgins said. Despite the fact that he doesn't see signs of recession on the immediate horizon, he predicted the Fed would lower rates by 25 basis points. Not giving the markets the 50-basis-point cut that's already baked into recent equity gains would be a way for the Fed to assert its independence from market concerns.

Kathleen Camilli, president of Camilli Economics LLC in New York, said that if Bernanke was really inclined to look six months ahead as opposed to waiting to see cumulative evidence, he would have already cut rates. She boosted her bet on the odds of a recession to 80% in early August from 30% in January, but said she believes the Fed is still collecting evidence and won't act pre-emptively, waiting instead to sees clear proof of deterioration in the broader economy.

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