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Economy gaining but not enough to cut unemployment

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Photo by AP Photo/Rick Bowmer

Job seekers stand in line during U.S. Rep. Jaime Herrera Beutler's "Getting Southwest Washington Back to Work Job Fair," Wednesday, Sept. 28, 2011, in Vancouver, Wash. The number of people seeking unemployment benefits fell to the lowest level in 5 months.

WASHINGTON — The economy is showing signs of modest improvement — not enough to reduce high unemployment but enough to ease fears that another recession might be near.

Fewer people applied for unemployment benefits last week, though some of that was due to technical factors. And the economy grew slightly more in the April-June quarter than previously estimated. Growth is also expected to tick up in coming months.

Investors drew some hope from the latest data, as well as from news that Germany's government approved a plan to bolster Europe's response to its debt crisis. The Dow Jones industrial average surged 163 points in mid-day trading.

Other news Thursday was less encouraging. Chief executives of the nation's largest companies are more pessimistic than they were just three months ago, according to a survey by a trade group, the Business Roundtable.

Only about one-third of the CEOs said they plan to hire or boost spending in the next six months. That's down from about half who said so in June.

And fewer Americans signed contracts to buy homes in August, the second straight month of declines. The National Association of Realtors said its index of sales agreements fell 1.2 percent to 88.6. A reading of 100 is considered healthy.

The economy expanded at an annual rate of 1.3 percent in the April-June quarter, up from an estimate of 1 percent made a month ago, the Commerce Department said. The improvement reflected modestly higher consumer spending and a bigger boost from trade.

Even so, the economy grew at an annual rate of just 0.9 percent in the first six months of the year. That's the weakest six-month performance since the recession ended more than two years ago.

Most economists don't expect another recession, but they also don't see growth accelerating much. Many predict a rebound to between 2 percent and 2.5 percent growth in the current quarter.

"Growth remains sluggish and insufficient to reduce the unemployment rate," Ryan Sweet, an economist at Moody's Analytics, said in a note to clients.

The unemployment rate was stuck at 9.1 percent in August for the second straight month. Employers didn't add any jobs in August — the weakest showing in nearly a year.

Even though growth has probably strengthened a bit in the July-September quarter, the economy suffered shocks that will restrain growth in the final quarter of this year, economists say.

In August, consumer confidence plunged after lawmakers battled over raising the government's borrowing limit and Standard & Poor's cut its rating on long-term U.S. debt. That sent the stock market sharply lower, which hurts consumers' ability to spend.

Retail sales were flat in August, a sign the turmoil caused consumers to pull back.

Businesses and investors are also worried that Europe won't be able to prevent Greece from defaulting and worsening the region's debt crisis. Those fears sent the U.S. stock market down 6.4 percent last week, its biggest weekly loss since October 2008, in the midst of the financial crisis.

If Greece defaults, that could destabilize other indebted countries, such as Portugal, Ireland and Italy. It could also harm many of Europe's banks, which own Greek debt.

And if European banks hoard cash to make up for their losses and stop lending to their U.S. counterparts, that could restrict credit in the United States and slow the economy. And a financial crisis in Europe would reduce U.S. companies' exports and sales to the region.

The slow growth and turmoil have raised fears that the U.S. economy could enter another recession. Some economists put the odds as high as 40 percent.

Weekly applications dropped 37,000 to a seasonally adjusted 391,000, the Labor Department said Thursday. That's the lowest level since April 2 and the first time applications have fallen below 400,000 since Aug. 6.

Some of the improvement was due to technical factors related to the seasonal adjustment of the data, a Labor Department spokesman said. The spokesman also said some states reported higher applications in previous weeks due to Hurricane Irene.

As a result, the drop in applications for unemployment benefits "may not be as encouraging as it looks," said Paul Dales, an economist at Capital Economics. "Further falls will be needed before we can conclude a downward trend is underway."

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AP Business Writer Derek Kravitz contributed to this report.