U.S. economy gaining but not enough to cut unemployment

WASHINGTON -- The economy is showing signs of modest improvement -- not enough to reduce high unemployment but enough to ease fears that another recession might be near.

Fewer people applied for unemployment benefits last week, though some of that was due to technical factors. And the economy grew slightly more in the April-June quarter than previously estimated. Growth is also expected to tick up in coming months.

Investors drew some hope from the latest data, as well as from news that Germany's government approved a plan to bolster Europe's response to its debt crisis. The Dow Jones industrial average finished up 143 points, or 1.3 percent, after a day of volatile trading.

Some of the news Thursday wasn't encouraging. Chief executives of the nation's largest companies are more pessimistic than they were just three months ago, according to a survey by a trade group, the Business Roundtable.

Only about one-third of the CEOs said they plan to hire or boost spending in the next six months. That's down from about half who said so in June.

And fewer Americans signed contracts to buy homes in August, the second straight month of declines.

The economy expanded at an annual rate of 1.3 percent in the April-June quarter, up from an estimate of 1 percent a month ago, the Commerce Department said. The improvement reflected modestly higher consumer spending and a bigger boost from trade.

Even so, the economy grew at an annual rate of just 0.9 percent in the first six months of the year. That's the weakest six-month performance since the recession ended more than two years ago.

Many Americans are spending less because they're paying off debt. That trend is likely to hold back the economy in the months ahead.

Michelle Fregoso, 32, and her husband recently put off buying a new car, and they canceled a gym membership. They're focused on paying off their credit cards.

All the talk of slow growth and a possible recession has made Fregoso, who lives and works outside Chicago, more cautious.

"Obviously the economy stinks," she said. "We just want to be careful about how we're spending our money."

Weak consumer spending, high unemployment and financial market turmoil could slow growth for the rest of this year.

Most economists don't expect another recession. But they also don't see growth accelerating much. Many foresee a rebound to between 2 percent and 2.5 percent growth in the current quarter.

A forecasting panel for the National Association for Business Economics predicts that growth for all of 2011 will be just 1.7 percent.

Many economists expect similarly tepid growth in 2012 and 2013. The economy would need to grow consistently at 4 percent to 5 percent to generate enough hiring to lower unemployment significantly.

"Growth remains sluggish and insufficient to reduce the unemployment rate," Ryan Sweet, an economist at Moody's Analytics, said in a note to clients.

The unemployment rate was stuck at 9.1 percent in August for the second straight month. Employers didn't add any jobs in August -- the weakest showing in nearly a year.

Economists expect little if any improvement in hiring for September. Sweet thinks employers will have added 50,000 jobs this month. More than twice as many jobs would be needed just to keep up with population growth.

Others are gloomier. Capital Economics predicts that the economy in September will have failed for a second straight month to create any jobs. The main problem, the firm says, is that businesses don't think their customer demand justifies additional workers.

Though growth has probably strengthened a bit in the July-September quarter, the economy suffered shocks that will restrain growth in the final quarter of this year, economists say.

In early August, for example, Congress fought to the final hours before raising the nation's borrowing limit. That delay, in part, led to a downgrade of long-term U.S. debt by Standard & Poor's. Stocks tumbled in response.

In addition, consumer confidence plunged last month to its lowest level since April 2009, when the economy was officially in recession.

And retail sales were flat in August, a sign that the turmoil caused consumers to pull back.

Businesses and investors are also worried that Europe won't be able to prevent Greece from defaulting and worsening the region's debt crisis. If Greece defaults, it could destabilize other indebted countries, such as Portugal, Ireland and Italy. It could also harm many of Europe's banks, which own Greek debt.

And if European banks hoard cash to make up for their losses and stop lending to their U.S. counterparts, that could restrict credit in the United States and slow the economy. A financial crisis in Europe would also reduce U.S. companies' exports and sales to the region.

Last week, applications for unemployment benefits dropped 37,000 to a seasonally adjusted 391,000. That was the fewest since April 2.

Some of the improvement was due to technical factors related to the seasonal adjustment of the data, a Labor Department spokesman said. The spokesman also said some states had reported higher applications in previous weeks due to Hurricane Irene.

As a result, the drop in applications for benefits "may not be as encouraging as it looks," said Paul Dales of Capital Economics. "Further falls will be needed before we can conclude a downward trend is underway."

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AP Business Writer Derek Kravitz contributed to this report.

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