Economists think second recession less likely now

WASHINGTON -- The economy may have a long way to go, but at least two big threats are fading.

Economists are less worried that the U.S. will experience another round of mass layoffs and its first bout of deflation since the 1930s after the release of two government reports Thursday.

The third drop in jobless claims in four weeks and a mild uptick in wholesale prices in August add to evidence that a second recession is unlikely.

Concerns about another downturn intensified last month when jobless claims spiked past the half-million mark. Wholesale prices, meanwhile, fell in early summer for three straight months. But those trends have, for now, reversed themselves, leaving an economy that is growing but at a pace too slow to create many jobs.

First-time applications for jobless benefits fell by 3,000 to a seasonally adjusted 450,000 last week, the lowest level in two months, the Labor Department said Thursday.

Despite the drop, initial claims for unemployment benefits are above levels that would signal a hiring boom. In a healthy economy, claims usually fall below 400,000.

And some companies are still letting go of workers -- FedEx announced Thursday it would be cutting 1,700 jobs.

Still, applications for unemployment benefits have dropped nearly 11 percent in the past month.

Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ, said last month's spike in claims was a "false alarm."

"The labor markets are stable, and companies are not increasing layoffs," he said in a note to clients.

David Resler, chief U.S. economist at Nomura Securities, said last month's leap in claims may have resulted from the ending of hundreds of thousands of temporary census jobs. With that distortion largely completed, the job market could stabilize, he said.

A second Labor report said wholesale prices, which measure price changes before they reach the consumer, rose 0.4 percent in August after rising 0.2 percent in July.

Excluding food and energy costs, so-called "core" producer prices were relatively flat. They rose just 0.1 percent and are up 1.3 percent in the past year. That indicates the weak economy is keeping inflation in check.

Concerns about deflation grew this spring after prices declined for three straight months. July's increase quieted most of those fears. Economists said Thursday's report confirmed deflation is not an immediate threat. Deflation is a prolonged drop in prices and wages.

Also Thursday, the Commerce Department said the broadest measure of the U.S. trade deficit widened for the fourth straight quarter. The current account trade deficit grew to $123.3 billion in the April-to-June period, a 12.9 percent increase from the first quarter. A year of growth could be viewed as a healing sign for the U.S. economy as Americans slowly regain their appetite to spend. That pushes up imports and widens the current account deficit.

The reports follow other data earlier this week that showed modest improvement in the economy. In August retail sales rose slightly and output at factories grew for the 12th time in 14 months.

Still, the unemployment rate is stubbornly high and there are no signs that companies are ready to add enough workers to change that.

Many analysts forecast that economic output will increase by less than 2 percent in the current quarter. That's down from 3.7 percent in the January-to-March quarter and not fast enough to reduce the 9.6 percent unemployment rate.

The number of people continuing to receive jobless benefits fell by 84,000 to just below 4.5 million, the claims report said. But that doesn't include several million people who are receiving unemployment aid under extended programs approved by Congress during the recession. The extended benefit rolls fell by more than a half-million to just under 5 million in the week ending Aug. 28, the latest data available.

Some companies are still cutting jobs. FedEx said Thursday that it would combine its money-losing FedEx Freight division with another unit. Shipments of refrigerators and other large appliances are still weak, the company said. FedEx will close 100 facilities and cut 1,700 workers.

And the Great Atlantic & Pacific Tea Co., a supermarket chain that owns A&P and other stores, said this week that about 600 of its workers in Connecticut face layoffs when the company closes several stores in the state this fall.

Some companies are adding jobs. A General Motors official said earlier this week that the company will recall 400 union workers to its engine-building plant in Spring Hill, Tenn. About 2,000 people were laid off from the plant last year.

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AP Business Writers Daniel Wagner and Jeannine Aversa contributed to this report.