Major stock indexes finished modestly lower Thursday, but gained for the month, as Federal Reserve Chairman Ben Bernanke said productivity will probably grow for some time. Earlier, a closely watched inflation gauge held relatively steady, while other economic reports bucked fears of a sharp slowdown.
The Dow Jones industrial average edged down 1.76 points, or 0.02%, to 11,381.15, a gain of 1.7% for August. The broader Standard & Poor's 500 slipped 0.46 points, or 0.04%, to 1,303.81, a 2.1% monthly increase. The tech-heavy Nasdaq composite lost 1.98 points, or 0.09%, to 2,183.75, jumping 4.4% on the month.
Trading was moderate ahead of the holiday weekend. NYSE breadth was positive, with 20 issues advancing for every 13 declining, while Nasdaq breadth was 16-14 positive.
A set of economic data Thursday suggested the economy still has some strength. Personal income rose 0.5% in July, in line with expectations. A gauge of personal consumption expenditures excluding food and energy, the core PCE deflator, rose 0.1% after a 0.2% increase in June. The core PCE deflator is the Fed's preferred measure of inflation.
The numbers suggest the Fed should not raise interest rates further, some analysts say. "With savings so low, higher interest rates, especially mortgage rates, could cause an abrupt change in consumer behavior," says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. "A sharp increase in savings could throw the economy into recession."
However, others expect inflation to continue its rise. "Monthly core PCE inflation was below its recent trend due to the impact of lower apparel prices, which we expect to reverse," says John Ryding, chief U.S. economist at Bear Stearns. "We see core inflation moving above the forecast range for 2006 in the coming months."
Meanwhile, jobless claims dropped 2,000 to 316,000 in the week ended Aug. 26, from an upwardly revised 318,000 the week before. The Chicago purchasing managers index of regional business activity fell to 57.1 in August from 57.9 in July. Factory orders dipped 0.6% in July after increasing 1.5% in June.
Fed Chairman Bernanke, speaking in Greenville (S.C.), said productivity growth is likely to continue its healthy post-1995 trend, but did not comment specifically on interest rates or inflation. Elsewhere, the European Central Bank kept its key interest rate unchanged at 3%, but policymakers indicated they would consider a rate hike in October to combat inflation pressures.
Friday's calendar holds a key report on August payrolls. Other data releases are set to include vehicle sales, construction spending, and the Institute for Supply Management's index of manufacturing activity.
On the company side, many retailers reported solid August sales. Wal-Mart (WMT), Federated (FD) and Limited Brands (LTD) were among store chains topping analyst estimates. Disappointments included Target (TGT), J.C. Penney (JCP) and Gap (GPS).
Among other stocks in focus, Ford (F) said it has begun exploring strategic options for its Aston Martin luxury brand, including a potential sale of all or part of the business.
Chemical maker Dow Chemical (DOW) said it would shut down three plants around the world as a measure to cut annual operating costs by $160 million.
Shares of Clorox (CLX) dipped after the consumer products maker tapped the president of Coca-Cola's (KO) North American unit, Donald Knauss, as its new chief executive.
In earnings news, telecom equipment maker JDS Uniphase (JDSU) was down sharply after the company said it expects its fiscal first-quarter revenue to fall below analyst expectations.
On the deal front, Vancouver-based miner Goldcorp (GG) offered $8.6 billion in stock for fellow Canadian miner Glamis Gold (GLG).
In the energy markets, October West Texas Intermediate crude oil futures closed up 23 cents at $70.26 a barrel, a decline of 7% for the month, ahead of an expected showdown between the U.N. and Iran over Tehran's nuclear plans.
European markets finished modestly lower. In London, the Financial Times-Stock Exchange 100 index lost 23.2 points, or 0.39%, to 5,906.1. Germany's DAX index slipped 7.96 points, or 0.14%, to 5,859.57. In Paris, the CAC 40 index was down 17.75 points, or 0.34%, to 5,165.04.
Asian markets ended higher. Japan's Nikkei 225 index rebounded 268.74 points, or 1.69%, to 16,140.76. In Hong Kong, the Hang Seng index gained 107.56 points, or 0.62%, to 17,392.27. Korea's Kospi index advanced 11.39 points, or 0.85%, to 1,352.74
Treasury yields remained near five-month lows after the relatively tame core PCE reading, says Action Economics. The 10-year note rose modestly in price to 101-04/32 for a yield of 4.73%, while the 30-year gained to 94-04/32 for a yield of 4.88%.