The major domestic equity indexes rallied more than 1% on Thursday, buoyed by gains in the trade-sensitive technology and industrial sectors as China expressed hope on trade negotiations with the United States, easing concerns that rising tensions could stoke a recession.
China’s commerce ministry said both sides are discussing the next round of talks scheduled for September, but progress would be determined by whether Washington could create favorable conditions.
Tech stocks with major tariff exposure, such as Apple, up 1.69%, and Microsof, up 1.89%, helped to send the technology sector index up by 1.73% for its best day since Aug. 16.
Chip manufacturers, which draw a large part of their revenue from China, also gained, sending the Philadelphia semiconductor index up 2.25%.
Industrial names that have also been highly correlated to trade progress, such as United Technologies, advanced with the sector up 1.77%.
Still, the three main indexes were on course to log their worst monthly performance and first monthly decline since a selloff in May, on worries the intensified trade battle between the world’s two largest economies will lead to a global recession.
The Trump administration on Wednesday made official its additional 5% tariff on $300 billion in Chinese imports and set collection dates of Sept. 1 and Dec. 15, prompting hundreds of companies to warn of price hikes.
Companies, including electronics retailer Best Buy and teen apparel retailer Abercrombie & Fitch, reported results earlier on Thursday and warned of the impact from tariffs. As a result, shares of Best Buy were down 7.99%, making it one of the worst performing issues on the S&P 500 index, while those of Abercrombie fell 15.10%.
Dollar General was the best performer among the companies making up the S&P 500 index, rising 10.68% on an upbeat full-year profit forecast. The S&P retail index rose 1.67%.
Approximately 6.01 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.23 billion share daily average over the past 20 trading days.
GDP Revised Down
Second quarter gross domestic product (GDP) growth was a bit lower than initially thought as increased consumer spending was offset by declining exports and a smaller inventory build.
According to Thursday morning’s report by the Commerce Department, GDP increased at a 2.0% annualized rate in the Department’s second reading of second-quarter GDP. That was revised down from the 2.1% pace estimated last month. The economy grew at a 3.1% rate in the January-March quarter. It expanded 2.6% in the first half of the year.
The current economic expansion is under threat from the Trump administration’s year-long trade war with China, which has undercut business investment and manufacturing.
The deterioration in trade relations between the U.S. and China has roiled global stock markets and triggered an inversion of the Treasury yield curve, fanning fears of a recession.
While manufacturing and housing data suggest the economy continued to slow early in the third quarter, consumer spending, backed by the lowest unemployment rate in nearly 50 years, has tempered some concerns about a downturn.
The economy is also losing speed as the stimulus from the White House’s $1.5 trillion tax-cut package and the government spending blitz fades.
When measured from the income side, the economy grew at a 2.1% rate in the second quarter. Gross domestic income (GDI) increased at a 3.2% pace in the January-March quarter.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, rose at a 2.1% rate last quarter, slowing from a 3.2% pace of growth in the first three months of the year.
The income side of the growth ledger was supported by a rebound in profits after two straight quarterly declines. After-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, increased at a 4.8% rate after dropping 1.5% in the first quarter.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.7% rate in the second quarter. That was the fastest since the fourth quarter of 2014 and was a slight upward revision from the 4.3% pace estimated last month.
The GDP report showed the trade deficit widened to $982.5 billion in the second quarter, instead of $978.7 billion as reported last month. Trade cut 0.72 percentage point from GDP growth last quarter instead of 0.65 percentage point as previously reported.
U.S.-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight.
Growth in inventories was revised down to a $69.0 billion rate in the second quarter from the previously estimated $71.7 billion pace. Inventories chopped 0.91 percentage point from GDP growth last quarter, instead of 0.86 percentage point as reported in July.
The slowdown in inventory accumulation reflects robust consumer spending and an uncertain economic outlook.
Business investment declined at an unrevised 0.6% rate in the second quarter, the first contraction since the first quarter of 2016. Growth in government investment was revised down. Spending on homebuilding contracted for a sixth straight quarter, the longest such stretch since the Great Recession.
Unemployment Claims Rise
The number of new applications for unemployment insurance rose moderately, pointing to sustained labor market strength despite slowing economic growth.
The Labor Department reported Thursday morning that initial claims increased by 4,000 to a seasonally adjusted 215,000 claims for the week ended Aug. 24. Data for the prior week was revised to show 2,000 more applications received than previously reported.
Last week’s increase in claims was in line with expectations. The Labor Department said only claims for the Virgin Islands were estimated last week.
The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, slipped 500 to 214,500 last week.
Layoffs have remained low despite a protracted trade war between the United States and China, which is crimping economic growth by undercutting business investment and manufacturing.
However, the pace of job growth has been slowing since 2018. The government estimated last week that the economy created 501,000 fewer jobs in the 12 months through March 2019 than previously reported, the biggest downward revision in the level of employment in a decade.
Still, the pace of employment gains remains well above the roughly 100,000 jobs needed per month to keep up with growth in the working-age population. Sustained labor market strength is supporting the economy through strong consumer spending.
Thursday’s claims report also indicated the number of people receiving benefits after an initial week of aid increased 22,000 to 1.70 million for the week ended Aug. 17. The four-week moving average of the so-called continuing claims dipped 250 to 1.70 million.
The continuing claims data covered the week of the household survey from which August’s unemployment rate will be calculated. The four-week average of continuing claims was little changed between the July and August survey periods, suggesting the jobless rate could hold steady at 3.7%.