Stocks: Market Holds Its Breath for Key 3Q Growth Report

Today the government releases its first estimate of economic growth in the third quarter, an announcement that could set the tone for the stock market-particularly bank stocks.

If the first of three estimates by the Commerce Department of growth in the gross domestic product shows improvement from the second quarter's paltry 1.8% rate, it could alleviate widespread concern that the economy is headed for recession and send stocks higher. A worse number could have the opposite effect.

"The GDP number is becoming more prominent" in investors' minds, said economist Scott Brown of Raymond James & Associates of St. Petersburg, Fla.

The expectation of a favorable number was a factor in a rally in bank shares Thursday, along with good news from Brazil, analysts said.

In a Bloomberg News poll of 37 economists, the average estimate of third-quarter GDP growth was 2.2%. Estimates ranged widely, however, from 0.9% to 3.0%.

A 2.2% reading would represent an improvement from the second quarter. But it would be well shy of the 5.6% rate of growth in the first quarter, before the effects of the Asian and emerging markets crises began to be felt in the U.S. economy.

Whatever number is reported will overstate the health of the economy, said Sung Won Sohn, chief economist of Norwest Corp. Mr. Sohn pointed out that the number will reflect the return of GM strikers to their jobs.

"Once you remove that, there is little economic growth to account for, which means that we are dangerously close to economic recession," Mr. Sohn said, even if the number matches the consensus.

Some economists said Thursday's rally showed how jumpy investors have become. Money-centers' shares surged Wednesday and again Thursday after the Brazilian government denied rumors that it was planning to devalue its currency and unveiled a fiscal package to bolster its languishing economy. The Standard & Poor's bank index rose 2.09%, outpacing the blue-chip Dow Jones industrial average, which rose 1.47%.

But a whiff of bad news could send the stocks lower again, economists said.

"A lot of the money managers are very inexperienced and know only bull- market prosperity," Mr. Sohn added. "The last couple of months have been a rude awakening for them. They are shell-shocked. And shell-shocked and inexperienced money managers tend to overreact.

"Investors are being fed many false hopes about the restructuring in Brazil and Japan," Mr. Sohn said. "We get news from Japan and Brazil that they are going to bite the bullet and fix the banking system, and there is euphoria in the market, but the historical record shows that we are let down most of the time."

Mr. Brown of Raymond James said that GDP numbers coming out on Friday will be just a first estimate of actual conditions. "There is still a lot that we don't know," he said.

The economist also said that consumer spending, a component of the GDP statistics, is slowing down, "which means slow growth and a possible downturn in the economy."

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