The S&P is up 2% and the NASDAQ is up 3.2% for the week.  Progress continues on the economic front as signs mount that the recovery is fully underway.  The short week following Labor Day started on a high note with ISM Manufacturing rising to 54.7, its highest reading since December.  It was also the second month above 50 signaling thatU.S.manufacturing is growing after four months of contraction.  The Institute’s production index rose to 61.6, the highest in four years.  Inventories are lean so factories must step up production to meet rising demand.  But so far, the increase in factory output has not increased hiring as productivity continues to rise faster than the economy.

Stock investors earnestly began to believe that the U.S. economy was in recovery on March 12th.  Microsoft and Intel were among the volume leaders that day as major headlines read “U.S. stock indexes have biggest gains in five months.”  Sparking the rally were comments from the administration indicating that it would extend diplomatic efforts to disarmIraq, effectively delaying the war.  In the following days many analysts characterized the good market action as a short-term reaction to news war delay, but time has shown know that investors were looking at the larger picture and anticipating economic recovery beyond the war.  

Yesterday, the Labor Department reported that productivity grew more than twice as fast in the second quarter than in the previous three months as the economy accelerated.  The increase of 5.7% was considerably over analysts’ estimates of 4.1% and the fastest since the third quarter of last year. 

As we begin the 34th day of this hot, hot summer, corporate earnings and government reports are heating up as well.  In the prior couple of months stock prices have run up in anticipation of both, defying the normal seasonal pattern of sluggish equity returns. 

The earnings reporting season is in full swing now with a quarter of S&P 500 companies reporting this week.  The results were quite good on balance as numerous companies soundly beat analysts’ estimates.  Those companies beating analysts’ estimates span a broad range of industries.  They include Caterpillar, SanDisk, Boise Cascade, Georgia-Pacific, Bank of America, Merrill Lynch, USA Truck, Marriott Int’l, Coca Cola, Ford, Johnson & Johnson, Stryker, New YorkTimes, and BB&T.  The list of companies surprising negatively is much shorter.  But it includes some notables like Kraft Foods, Fannie Mae, FleetBoston, Hershey Foods, Sears, and Microsoft.  

On Wednesday the Federal Reserve policymakers did something they rarely do.  They cut rates even while suggesting the economy is improving.  Furthermore, they suggested they do not plan to tighten policy (raise rates) to preempt a potential burst of growth.  The Fed cut the benchmarkU.S.interest rate to a 45-year low of 1% to boost economic growth and prevent further slowing of inflation.  Their statements and actions suggest that rates will remain low, even fall further, for an extended period of time.  Basic economics suggests that as businesses and investors begin to accept that low interest rates are here to stay, they will begin investing in longer term and riskier projects to create economic growth.  But we know the major problem facing investors and business leaders today is a lack of confidence.  The latest cut is an attempt by the Fed to show that they are willing to do what is necessary to reinvigorate economic growth. 

Early this week investors were treated to a very nice surprise when the Federal Reserve reported that manufacturing in New York State expanded considerably more than expected this month.   Orders and sales grew the most since January, bolstering expectations the economy will accelerate in the second half.  The DOW rose 202 points as investors said the report may foreshadow a strengthening in U.S. manufacturing, which contracted from March through May.  The New York results prompted Bear, Stearns & Co. and Lehman Brothers Inc. to raise their forecasts for Thursday's Fed report on factories in the Philadelphia area according to Bloomberg.

During the next two weeks, as the second quarter comes to a close, we will hear from those corporations who wish to better prepare their shareholders for the actual results they expect to report later in July and August.  The ‘pre-announcement’ season is typically used by corporations to soften the blow of bad earnings news.  Pre-announcements can be vague and, therefore, cause a less a dramatic impact on the stock than the reporting of actual results might.  At this point the companies themselves don’t know their final results, so they must be somewhat vague.

In nine of the last ten trading days the S&P 500 index has increased.  While two weeks is not a market trend, as the market is random in the short-term, it surely makes people feel better.  On the anecdotal side, my conversations with clients, friends, and business associates have unanimously confirmed a growing optimism about the economy.  Government statistics remain mixed, but are showing signs of improvement.