Strong U.S. Economic Data May Mislead - TheStreet

NEW YORK (

TheStreet

) -- Investors cheered strong readings on consumer sentiment and manufacturing activity in the Chicago area, but the potential for the economy to slip into a recession remains on the table.

The University of Michigan reported that consumer sentiment rose to 59.4 in September, following an August reading of 57.8. Economists were bracing for a slip in the sentiment level to 57.5.

Economists worry that pessimism from consumers over stock market volatility, lack of fiscal leadership in Washington and uncertainty over the European debt crisis may lead to a negative feedback loop that would further drag down an already weak economy.

The recent reading on sentiment eased from lows not seen since the financial crisis of 2008. However, sentiment is still low enough to negatively affect consumption, a big part of U.S. gross domestic product.

Also this morning, the Chicago Purchasing Managers Index for August rose to 60.4 in September from 56.5 in August. The report was another welcome surprise given that August saw the lowest level since November 2009. Consensus estimate called for a third straight sequential decline to 54.

The reading was well above 50, which is the threshold dividing expansion and contraction in the economy, and a sign for improvement in business activity at the national level.

However, Barclays Capital Research notes in a report that "we would be careful about reading too much into the September increase, given that this survey has taken a consistently stronger tone than other measures of manufacturing activity in recent months."

Amid uncertainty over whether debt talks in Europe will bring about help for debt-laden countries like Greece and stabilize the region's financial system, investors have been especially cautious about jumping to conclusions based on single positive data points.

There are still plenty of economic indicators that continue to disappoint. A report on personal consumption early Friday was modestly weaker than expectations.

Before the open, personal income slipped 0.1% and spending increased 0.2% in August, according to the Commerce Department. Economists were looking for slight gains to income and spending of 0.1% and 0.2%. In July, spending rose a revised 0.7%, while income decreased a revised 0.2%.

-- Written by Chao Deng in New York.

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