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The Market Is Primed for Good News

If the data are as good as some expect, Thursday's swoon may have set up Friday's market for a run.

Concerns about Friday's employment data and national Institute for Supply Management survey were cited as contributors to Thursday's

afternoon retreat. However, the chatter prior to 3 p.m. EDT was how Thursday's data augured positive surprises from today's key reports.

At 55.9, the July Chicago Purchasing Managers Index was up for the third straight month and to its highest level since January. The new orders component, at 61.7, was at its highest level since November.

Since the late 1990s, there has been a greater-than 85% positive correlation between the Chicago PMI and the national manufacturing survey, according to MG Financial Group. Thus, the Midwest survey spurred expectations that Friday's national ISM survey will best forecasts of 52.0.

Meanwhile, employment in the Chicago survey rose to 46 from 43.8 and weekly jobless claims fell to 388,000, a second week below the closely watched 400,000 level. Those figures encouraged speculation that July payrolls will rise more than consensus expectations of 10,000.

"By the end of the year, certainly the first quarter, I suspect we'll see the unemployment rate come down in a meaningful and sustained way," said Paul Kasriel, chief U.S. economist at Northern Trust in Chicago. "The economy needs to grow 3.5% for a few quarters to bring unemployment down and there's a risk

GDP could be stronger."

Kasriel forecasts 3.5% GDP growth in both the third and fourth quarters, but he's not expecting the unemployment rate to come down when the July numbers are released at 8:30 a.m. EDT. The consensus forecast is the unemployment rate will remain at 6.4%.

The question then becomes how much, if any, upside surprise from the data is priced into shares. Perhaps the only salvation for bulls after the market's final-hour swoon Thursday is that seeds of doubt were sown. Doubt about the market's ability to rally past key resistance levels -- such as

S&P 500

1005 -- and, presumably, doubt about Friday's slate of economic data. (In addition to the aforementioned, auto sales, construction spending, personal income/spending and the University of Michigan consumer sentiment survey are also on the docket.)

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If nothing else, dampened expectations in the wake of Thursday's session is something bulls can hang their horns on.

If the data do prove stronger than expected, there's now more "room" for a solid advance, arguably more so than if Thursday's intraday highs had been sustained.

Conversely, bears are surely to be emboldened after the market couldn't hold Thursday's big gains when the news flow was decidedly positive. They will no doubt be looking to press the downside if Friday's data prove disappointing.

Certainly, Friday shapes up to be an interesting session.

Don't Look Back

Meanwhile, perhaps the biggest news Thursday was the advance second-quarter GDP report, which rose 2.4% vs. expectations for more tepid growth of 1.5%. Prior to Thursday, the conventional wisdom was that the second-quarter GDP was a lagging indicator, and that the expected weakness should not restrain the "forward-looking" equity market. Of course, when the number proved much stronger than expected, the optimists were energized, at least for a few hours. Some even used components of the GDP as justification for expectations of robust second-half growth.

Although a 7.5% rise in government spending gave GDP a big boost and the personal consumption expenditures price index slowed to 0.9% from 2.7% (undermining speculation disinflation is dead), bulls noted capital spending was up 6.9%, its best performance in three years. Furthermore, a decline in inventories shaved an estimated 0.8% from second-quarter GDP. Similarly, the inventory component of the Chicago PMI report fell to 39.4 from 48.8.

Low inventories are believed to be a harbinger of faster growth because production will have to ramp up faster to meet demand.

Thursday's "GDP is backward-looking, but inventories being low suggests a bounce back in production and inventories in the third quarter," which will spur even higher GDP growth, said Gerald Cohen, senior economist at Merrill Lynch. "The last three months have provided mixed signals, but now we're seeing increasing signs it's more in one direction; the predominance of statistics is positive."

In fairness, Cohen is far from wildly bullish about the economic outlook. Thursday's data were insufficient to prompt Merrill to up its forecast of 3.5% third-quarter growth and 2.75% fourth-quarter growth, which equates to a below-consensus outlook for the second half. The economist is "cautiously optimistic," he said.

In some regard, cautious and optimistic were the operative words Thursday, with caution winning out in the end. Friday, of course, being another day.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.