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Data Show an Economy Trying to Stabilize

The Chicago PMI, second-quarter GDP revision and consumer sentiment numbers keep economists guessing.
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Investors are getting used to the kind of economic news that flooded the market Friday morning. Most of it was bad, and the parts that could conceivably give rise to optimism are either dated or too inconclusive to bother with.

Take, for instance, the Chicago purchasing managers' index, a gauge of manufacturing activity in the Midwest, which rose in September to 46.6 from 43.5 in August. That's still below the reading of 50 needed to call an expanding economy, although one component -- production -- did inch into expansion territory, at 51.5.

"This is characteristic of an economy that is trying to stabilize," said Mickey Levy, chief economist at Banc of America Securities. "But we will have renewed declines in October." The Chicago PMI's employment barometer advanced to 35.5 in September from 33.7 in August, while new orders increased to 49.9 from 46.6.

The National Association of Purchasing Managers, which compiles the report, said it received one quarter of its responses before Sept. 11. The rest were received after the terrorist attack, although it's impossible to say when they were filled out. "I think it's a fluky number," said Bill Quan, an economist at Aubrey G. Lanston. "Manufacturers were shell-shocked from Sept. 11 through Sept. 20. I don't think they had enough time to react."

In a second report, the University of Michigan consumer sentiment index tumbled to 81.8 in September, its lowest level since 1993, from 91.5 in August. Economists had expected a reading of 79.6, however. "The drop was smaller than expected," said Quan. "But I expect things to get worse."

Following the events of Sept. 11, consumer spending, which makes up two-thirds of the U.S. economy, remains the big area of concern. On Sept. 24,

Federated Department Stores

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, for example, said sales in the week following the terrorist attacks were 15% below plan. While the company said it was still difficult to estimate the ongoing trend, it expects September sales to decline by up to 20%.

The current conditions component of the sentiment index fell to 94.6 in September from 101.2 in August, while the future expectations index dropped to 73.5 from 85.2. The index is consistent with declining consumption over the next few months, but it doesn't give a very clear picture.

"This drop is not surprising, considering the shock to the nation," said Sung Won Sohn, an economist at Wells Fargo. "This does not bode well for consumer spending."

The other major piece of economic data released today, the final revision to the gross domestic product, showed the economy grew by 0.3% in the second quarter, its lowest level in eight years. Economists put little stock in the gain, since it reflects the economy in August, not now.

Most encouraging about the report was a large inventory drop. "In the second quarter, inventories subtracted 1.5% from the GDP," said Sohn. "I expect that number to be flat in the third quarter."

For his part, Sohn says it's too early to call a recession in the economy, as so many analysts have done since the attack on the U.S. "We just don't have enough data to show that we're there yet," said Sohn. "We don't know how this is going unfold."