Markets cheer airline merger, U.S. economic data

By Renae Merle
Washington Post Staff Writer
Tuesday, May 4, 2010

Stocks surged Monday after positive economic data, a massive airline industry merger and a financial bailout package for Greece sparked optimism about the prospects for growth in the U.S. and global economies.

The Standard & Poor's 500-stock index, which had fallen last week below its benchmark level of 1200, gained 1.31 percent, or 15.57 points, to close at 1202.26. The Dow Jones industrial average, which tracks 30 blue-chip stocks, was up 1.3 percent, or 143.22 points, closing at 11,151.83, while the tech-heavy Nasdaq gained 1.53 percent, or 37.55 points, to 2498.74.

Monday's rally helped wipe out some of last week's losses, which had been provoked in part by investor fears that Greece's debt problems could spread to other parts of Europe. On Sunday, Greece announced a deal for a $145 billion financial rescue package from the European Union and International Monetary Fund. The rates Greece must pay to borrow money fell Monday, indicating that investors were no longer as fearful that the country would default on its debt.

The market is also drawing strength from the $3 billion merger agreement announced Monday between Continental Airlines and the parent company of United Airlines, which would create the world's largest airline if completed. Shares of both companies rose more than 2 percent in trading on Monday.

"Would you be interested in putting together the world's largest airline if you were concerned about the economy?" said Phil Orlando, chief equity market strategist at Federated Investors in New York. "That tells me that there is some confidence about the domestic and global economy as well as what is going on in the industry."

Analysts said that a healthy level of mergers and acquisitions are an indication of economic recovery. "It is a sign that businesses are once again focused on growth and market share as opposed to looking for cost savings and cutting budgets," said Jeff Kleintop, chief market strategist for LPL Financial. "It shows that businesses are willing to spend money on growth."

Investors were also encouraged by data released Monday showing that manufacturing and construction in the United States were rebounding.

The U.S. manufacturing sector expanded more than analysts expected in April, according to the Institute for Supply Management, which said its index of manufacturing reached 60.4 points last month -- up from 59.6 in March and the fastest pace of growth since June 2004. The increase helped lift industrial stocks, with Goodrich and Caterpillar up about 3.8 percent and 2.7 percent respectively.

New orders jumped, while the inventory of goods fell -- another good sign, analysts said. The gap indicates that production is barely keeping pace with demand, raising the prospect of more manufacturing growth, they said. It could also translate into more hiring soon, boosting the still-weak labor market.

"Bottom line: This is a strong report on the U.S. economy, indicating that the production recovery, which commenced vigorously back in July 2009, continues to move ahead at a very good pace," Brian Bethune, chief U.S. financial economist for IHS Global Insight, said in a research note.

Meanwhile, after being hampered by bad weather in February, construction spending rose 0.2 percent in March, according to the Commerce Department. Analysts had expected spending to fall. That was offset by negative revisions to February's data.

But there were also signs of life in consumer spending, which makes up about two-thirds of economic activity. Personal spending rose 0.6 percent in March, the biggest jump in five months, according to the Commerce Department. Personal income rose 0.3 percent. That could indicate that consumers have growing confidence in the economy, despite weakness in the job market, analysts said.

The saving rate fell to 2.7 percent in March, down from 3 percent in February. While some analysts cheered the dip as an indication that consumers have become more confident that they will find jobs or keep the ones they have, others questioned whether people were saving less to keep up with their bills. If the explanation is the latter, then the uptick in personal spending may be short-lived, said Paul Dales, an economist with Capital Economics.

"Our concern is that people will spend through their savings and the spending will have to come down," he said.

The key may be whether the labor market begins to show improvement soon. Analysts are expecting a government report to show the addition of 200,000 jobs on Friday, most of it associated with temporary hiring for the 2010 Census. "If we start seeing some pickup in the labor market, then we will have to reconsider [our forecast] that the consumer sector is going to remain weakish," Dales said.

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