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Philadelphia market shows economic growth

Adding to the growing signs of an economic recovery, the bellwether Philadelphia manufacturing index rose to its highest level since June 2007, the Federal Reserve Bank of Philadelphia reported yesterday.

Adding to the growing signs of an economic recovery, the bellwether Philadelphia manufacturing index rose to its highest level since June 2007, the Federal Reserve Bank of Philadelphia reported yesterday.

The report was the second straight positive monthly reading for the Philadelphia-area index, which closely tracks the national economic performance, as well as other recent good economic news.

The report adds to a string of encouraging economic data that has sent the stock market on a six-month ascent. In turn, that has spawned a lively debate: Is this a genuine bull-market rally or a mirage that will be blown away by weak corporate earnings, rising unemployment, and too-little spending by consumers?

U.S. industrial activity is growing and new jobless claims, though still very high, appear to be moderating.

But deep concerns remain in two key areas: consumer confidence and the unemployment rate. Unemployment is likely to exceed 10 percent later this year, making many wonder if the positive momentum of stocks can hold into the fall and winter.

Stocks fell modestly yesterday, with the Dow Jones industrial average shedding 7.79 points to 9,783.92, on tepid reports for new jobs claims and new housing starts.

The Dow has soared 49.44 percent since its March 9 low of 6,547.05 and, many analysts say they believe, could pass 10,000 soon. The Dow first crossed that mark before the 2001 recession, in April 1999. But it was beaten down in the dot-com bust and then again in the current recession.

Jeremy Siegel, a University of Pennsylvania Wharton professor, said he believed that the stock market gains were justified and that the share prices could go higher because of upward revisions of corporate profits.

"We're out of the recession, that's clear," Siegel said.

Mike Trebing, senior economic analyst at the Philadelphia Federal Reserve, which produces the monthly business outlook survey, said that economic signs among regional manufacturers were looking good.

The broadest measure of manufacturing activity in the Philadelphia area increased to 14.1 in September, from 4.2 in August. A reading of zero indicates no growth, and a negative reading indicates a contraction.

But Trebing cautioned - as other economists have - that economic growth could slow through the end of 2009.

Philadelphia manufacturers were still cutting jobs in early September, according to the survey. The employment index worsened this month with 24 percent of the reporting companies saying they cut jobs and only 10 percent saying they added jobs. But companies indicated they would hire again within six months.

"We're not going to see a big kick, but we're moving in the right direction," Trebing said of the remaining months of 2009.

Robert Dye, senior economist with PNC Financial Services Group, characterized the current situation as a "hangover economy," or an economy slow to get up and walk.

The financial crisis with banks, the decline in housing prices, and the global recession will retard what would normally be a pedal-to-the-metal recovery, Dye said.

The current recession began in late 2007, but it worsened dramatically in the last year with the credit crisis in the wake of the collapse of New York investment bank Lehman Bros. Holdings Inc., one of the largest bankruptcies in U.S. history.

Dye projects 3 percent growth in gross domestic product in the third quarter. But he also forecasts slower GDP growth in this year's fourth quarter and in early 2010.

The problem, Dye said, is a "hollow point" in retail sales in September because people accelerated vehicle purchases to take advantage of the "Cash for Clunkers" rebate program over the summer.

Auto sales during the program rose to an annualized rate of 14 million vehicles a year, compared with a pace of 10 million vehicles before the "Clunkers" program. The issue is whether sales now will fall back below the 10-million-a-year rate, with the end of the "Clunkers" program. Dye estimates that an annualized vehicle sales rate of 13 million would replace those cars junked each year by Americans.

The economy remains sensitive to shocks from bank failures, spikes in oil prices, or a terrorist attack, which could lead to a double-dip recession, Dye said. He expects a self-sustaining recovery by the second quarter of 2010 and the upward trend in the stock market to continue.