Mixed signals on economy

Shin writes for the Washington Post.

The manufacturing sector showed further signs of stabilization this month, with a key index rising to its highest level in nearly two years. But an unexpected bump in first-time jobless claims last week offered fresh evidence that a turnaround in the labor market is still a long way off.

Businesses have been trying to catch up to falling demand by slashing inventories and cutting jobs. Now they need to restock and that is helping to slow the decline in manufacturing, although not to the point where it is adding jobs.

The Federal Reserve Bank of Philadelphia on Thursday said its manufacturing index rose to 4.2 this month, positive for the first time in nearly a year and the highest level since November 2007. Activity in the mid-Atlantic region, home to many auto suppliers, was also helped by increased vehicle production.

"What we're seeing is the manufacturing sector is getting support from the inventory cycle. . . . That gets you only so far. After that you need final demand to carry the baton," said Joshua Shapiro, chief U.S. economist with MFR, a New York-based forecasting firm. "Unfortunately the consumer is in pretty bad shape still. The labor market remains weak, and household balance sheets are basically a wreck."

Most economic forecasters are predicting that the economy will grow in the third quarter, which runs July 1 through Sept. 30, after shrinking during the first two quarters. The Conference Board, a business research group, bolstered that outlook Thursday with the release of its index of leading economic indicators, which rose 0.6% in July, its fourth straight monthly increase.

"The indicators suggest that the recession is bottoming out and that economic activity will likely begin recovering soon," said Ken Goldstein, an economist with the Conference Board.

The question now is what sort of recovery?

Many analysts are expecting a tepid one largely because consumers are still digging out from debt and a record loss of wealth, which they are having a hard time rebuilding in the current labor market.

Job losses have slowed and first-time claims for unemployment benefits started to trend downward during the summer. But over the last two weeks they have reversed course.

The number of people nationwide filing for state unemployment benefits for the first time rose by 15,000 to 576,000, the Labor Department said Thursday, defying analysts' predictions that claims would drop by roughly the same amount. First-time claims remain below their peak in early January of 956,791 but well above the 300,000 range that marks a healthy economy.

Persistent weakness in the job market is shaping up to be one of the biggest threats to economic growth going forward, analysts said.

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