- The Washington Times - Friday, May 26, 2006

NEW YORK (AP) — Wall Street extended its rebound to a third session yesterday, ending with a moderate advance after personal consumption data bolstered the outlook for the economy and interest rates. The major indexes finished the week with solid gains.

Investors were upbeat about a Commerce Department report that income and spending rose last month, helped along by improved wages that kept consumers buying at stores. The change in core prices — excluding energy costs — also tailed off slightly to advance 0.2 percent last month.

But while the annual inflation rate edged up to 2.1 percent to sit just outside of the Federal Reserve’s targeted range, signs of easing demand in this week’s data showed the economy is headed for a more manageable rate of expansion. That suggests the inflationary pressures are not as bad as feared, and that the Fed might not need to raise rates further, said Michael Strauss, chief economist of Commonfund.

“We’re seeing an economy that’s transitioning from a very strong first quarter to what appears to be some sluggishness in the second quarter,” Mr. Strauss said. Recent data “provides signs that the consumer is slowing down. Maybe the Fed doesn’t need to do much more.”

Fewer existing home sales and a sharp drop in durable goods orders this week drove hopes that the Fed has raised lending rates enough to keep the economy from speeding off. A broker’s upgrade of General Motors Corp. also gave the market a boost in yesterday’s session.

The Dow Jones Industrial Average jumped 67.56, or 0.6 percent, to 11,278.61. The Dow gained 180 points since Tuesday.

Broader stock indicators were also higher. The Standard & Poor’s 500 Index rose 7.28, or 0.57 percent, to 1,280.16. The Nasdaq Composite Index added 12.13, or 0.55 percent, to 2,210.37, returning to positive territory for the year.

Advancing issues led decliners by more than 2 to 1 on the New York Stock Exchange, where volume of 1.34 billion shares trailed the 1.74 billion shares that changed hands Thursday. Volume was light ahead of the holiday weekend; U.S. markets will be closed Monday for Memorial Day.

Wall Street finally showed signs of strength after an inflation scare sent stocks racing downward over the past two weeks, slashed 5 percent from the Dow and turned the Nasdaq negative for 2006. Although stocks were sharply oversold, investors still appeared tentative about buying while they remained uncertain about the economy’s health.

Mild economic data this week helped them regain some faith in stocks and bonds, giving the major indexes their first weekly advance after two weeks of losses. For the week, the Dow rose 1.21 percent, the S&P; 500 gained 1.04 percent, and the Nasdaq jumped 0.75 percent.

“We’re getting the economic performance that the Fed is looking for: somewhat slower growth, but continued increases and a positive underlying environment,” said Ken McCarthy, chief economist for VFinance Investments. “The concern, of course, is inflation, and whether the slowdown is occurring fast enough to restrain prices.”

Yesterday’s consumption report was evidence that the consumer picture remains sound despite soaring energy prices. Personal spending growth matched estimates of 0.6 percent, while a 0.5 percent rise in income was below targets of 0.7 percent.

Elsewhere, the University of Michigan said its consumer sentiment index this month barely rose to 79.1 from a previous reading of 79. The index is down from a reading of 87.4 last month.

And Wall Street faces more tests next week, when reports on productivity, job growth and manufacturing activity are due.

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