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Consumers Fuel S&P

Liz Rappaport

The stock market cheered the American consumer Thursday.

In all their debt-laden, energy-guzzling glory, consumers were the only thing standing between the economy and a negative growth rate in the first quarter. With an eye to Friday's nonfarm payrolls report, investors drove the S&P 500 to another record with the confidence that if Americans have jobs, they'll keep emptying their wallets.

Although first-quarter GDP was revised down to a 0.6% pace, the markets barely blinked because the U.S. consumer put forth the strongest showing since the first quarter of 2004. The government revised personal spending up to 4.4%, from an initial estimate of 3.8%. Consumption added 3% to GDP in the quarter.

Retail stocks outperformed Thursday as the S&P 500 finished off its highs of the day, but up just over 1 point to set another record at 1530.62. The Dow Jones Industrial Average ended the day down a hair, or 5 points, at 13,627.64, and the Nasdaq Composite gained 0.5% to close at 2604.47. The NYSE Composite Index, the Russell 2000 and the Dow Jones Transportation Average closed the day at new all-time highs.

As if on cue, Prudential's ultra-bullish equity strategist Ed Keon published a note Thursday evening reiterating a forecast that the S&P 500 will end the year at 1650, adding taht it could go to 2000 by 2009.

Keon recommends the brokers, which also outperformed Thursday on news that Wachovia(WB) is buying A.G. Edwards(AGE) for $6.8 billion. The Amex Securities Broker Dealer Index rose 2.8% on the day.

The S&P Retail Index added 0.9% while retailers of all stripes gained ground. Name-brand apparel companies like Guess(GEX), Abercrombie & Fitch(ANF) and J.Crew(JCG) added 2.9%, 1% and 6.5%, respectively.

Target(TGT) added 2.2%, Wal-Mart(WMT) another 1%, while electronics retailers Best Buy(BBY) and Circuit City(CC) each gained more than 2% on the day. Circuit City announced Thursday that it has cut 200 job cuts as part of its restructuring plan.

Personal spending is "the main variable to watch in the weeks ahead," writes Tony Crescenzi, chief fixed-income strategist at Miller Tabak, and a RealMoney.com contributor.

The rest of the day's news also helped push stocks higher as optimism prevails about the looming torrent of economic data coming out Friday morning, including payrolls.

Most analysts expect to see a gain of 130,000 new jobs added in May, though the estimates may be slightly low. Signals like six declining weeks of jobless claims out of seven, a jump in the employment index in Thursday's Chicago PMI report, and some forecasting challenges point to a payrolls report at least in line with expectations.

Economists erred on the side of caution with payroll forecasts this month because they have less current data to draw on. The Institute for Supply Management's manufacturing and service sector reports come out Friday and Monday, respectively.

"This makes forecasting more hazardous than usual," says Joe Brusuelas, chief economist at IDEAglobal.

Many economists felt their caution was vindicated when the ADP National Employment Report came out Wednesday to reveal 97,000 new jobs added in May. The conventional wisdom is to add 25,000 jobs to the ADP report to account for new government jobs that ADP doesn't include. But some were kicking themselves by Thursday morning when the Chicago PMI report showed a jump to 57.3 on regional employment from 50 in April.

Debate centers around residential construction jobs, which have fallen amid the housing market slump, but not nearly as much as economists had expected. Deutsche Bank's chief U.S. economist Joe Lavorgna predicts a 70,000 payrolls report because he believes this is the month the construction-job losses hit the tally, as the backlogged housing orders are completed.

That day of reckoning may never happen, though, as Thursday's construction spending report revealed a higher-than-expected 0.1% gain in April. As residential housing slumps, government and commercial construction activity may pick up the slack and the related jobs.

Rest up for more clues Friday morning into the job market, the state of manufacturing, income and spending data, inflation, and consumer sentiment. If that sounds stressful, maybe a little retail therapy would help.