US stock markets rebound

The economic news has calmed the US markets

America's leading stock markets ended the week on a high, as they clawed back some of the ground lost in last week's historic declines.

The Dow Jones Industrial Average closed up 165 points at 8847, 7% higher than last Friday's close.

One of the best performing sectors was insurance, which rebounded strongly after bankruptcy fears proved groundless.

Nevertheless, the Dow still recorded its worst quarter since 1987, down about 1,700 points over the three month period.

The high-tech dominated Nasdaq index closed about 5% up on the week, at 1498.

The stock market gains came on the last trading day of the third quarter, which can be volatile as fund managers adjust their portfolios.

Slightly faster growth

The markets took heart from latest figures which showed the US economy grew slightly faster than previously thought during the three months from April to June, although it still remains dangerously exposed to the aftermath of the 11 September attacks, observers said.

Statistics released by the US Department of Commerce for gross domestic product (GDP) growth in the second quarter showed the economy grew at just 0.3%.

Growth in the first quarter was 1.3%, a far cry from the breakneck growth seen in the mid-1990s at the height of the technology boom.

Estimates beaten

The GDP figure, which is the broadest-based indicator of the economic health of a nation, beats the preliminary estimate announced last month of 0.2%, and contrasts with expectations that it could be revised downwards to 0.1%.

Slower demand for imports was seen as one of the key causes of the uprating.

But the result still represents the worst quarterly growth since the first three months of 1993.

And economists are generally doubtful that the improved figure will stop the Federal Reserve from cutting interest rates for the ninth time this year from their current level of 3%.

Confidence stumbles

Although analysts broadly cheered the news, the gloss was taken off the celebrations by news that the University of Michigan's final consumer sentiment index had taken another fall.

The closely-watched index fell to 81.8 in September, its lowest level in nearly eight years, and down from 91.5 in August.

This is the second major survey of US consumer confidence this week, following a similar slump in a poll from the Consumer Board.

Half of the 500 responses to the Michigan survey were taken after the attacks.

Consumer confidence was already weakening as the economy slowed sharply before the attacks that destroyed the World Trade Center and damaged the Pentagon outside Washington, D.C.

Recession off the cards - for now

The final GDP data was eagerly watched by economists, some of whom feared that the revised figure could turn negative.

The third quarter is likely to show a contraction of perhaps 0.5%, especially given that economic activity was brought almost to a halt in the first few days after the attacks on New York and Washington DC.

Two successive quarters of contraction is the technical definition of recession, and thanks to the second quarter numbers that cannot now occur till the end of this year at the earliest.

"It looked good," said Hugh Johnson, chief investment officer at First Albany Corp in Albany, New York.

"It's encouraging, but let's not forget that the focus is on the third quarter and beyond, and that looks a little gloomier.

"It's really very backward looking... there have been significant downward revisions to third and fourth quarter GDP estimates this year since the attacks."

Inventories shrink

One driving force for the slowdown throughout this year has been the decision by businesses to run down their inventories, stacked up high through the boom of the late 1990s.

According to the Commerce Department, the inventory shift subtracted 0.42 percentage points from the overall growth figure, slightly less than the 0.43 points in the initial estimate.

Overall, consumer spending remained the main driver of growth in the second quarter - underpinning the key fear about coming contractions.

Spending rose 2.5% between March and June, and all the evidence suggests that this figure will not be sustained into the third quarter.

Personal consumption - also an indicator of consumer spending - rose 1.3% in the quarter, down from the earlier estimate of 1.6%.