The negativity hangs around the economy and markets like a shadow and is not receding even with some encouragement in the form of stray positive data points and handholding by the government. Last Thursday, president Obama proposed a new plan to boost job growth, which by economists' estimate is more extensive than expected. The job market could see a definitive modest to moderate lift next year if the plan is implemented.

Taking cognizance of the malaises plaguing the global economy, the European Central Bank's, ECB, Governing Board, which met last week, turned decisively dovish. The ECB president Jean Claude Trichet's statement that "the main message is uncertainty" and that "the situation is extremely demanding" is construed by Danske Bank as an indication that the central bank may actually cut rates after embarking on a path of normalization earlier this year.

Meanwhile, BMO Capital Markets states that the probability of a double-dip recession looks less likely, as the U.S. economy is leaning towards a near-comatose rate of growth of 0.7 percent in the first half. Exports and the non-manufacturing sector showed surprising resilience in August and consumer credit growth has also returned to pre-recession levels. Therefore, one can breathe slightly easy although reclining without cares is out of question now, given the difficulties faced by the job and housing markets and the manufacturing sector.

Last week, the Institute for Supply Management reported that its non-manufacturing index rose to 53.3 in August from 52.7 in July. Meanwhile, the business activity index fell 0.5 points to 55.6, while the new orders index rose 1.1 points to 52.8. The order backlogs index moved up 3.5 points, although it remained below "50" at 47.5. The employment index fell about a point to 51.6. Of the 18 industries surveyed, 10 saw growth and 5 industries contracted, while the remaining 3 remained in neutral territory.

Meanwhile, the Federal Reserve's Beige Book showed that activity continued to expand at a modest pace in the twelve Federal Reserve districts. Consumer spending was also reported to have increased, although non-auto retail sales remained flat in several districts. The Beige Book noted that tourist activity remained solid in most districts, while demand for services was also positive. However, manufacturing conditions remained mixed, with many districts reporting a slowdown in the pace of activity.

The report also spoke about weak commercial real estate and construction activity and stable or slightly weaker loan demand. Additionally, pricing pressure was seen to be edging lower, while the labor markets were generally stable.

Readings on manufacturing, inflation and consumer spending are likely to be in focus in the unfolding week, as the economy navigates through a crucial phase. Traders are expected to pay attention to the results of the New York and Philadelphia Federal Reserves' manufacturing surveys for September, the Federal Reserve's industrial production report, the Commerce Department's retail sales report for August and the weekly jobless claims report.

Additionally, the preliminary reading of the Reuters/University of Michigan's consumer sentiment survey and the producer and consumer price inflation reports for August may garner some attention. The Labor Department's import and export prices report for August, the business inventories report for July, the Treasury Budget for August, a Fed speech and The Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the economic events of the week.

The fragile consumer confidence and worsening economic environment may have held back consumers to some extent in August. Therefore, the month may have seen a slowdown in the pace of spending following a robust 0.5 percent gain in the previous month. Nevertheless, supported by July's strong performance, consumer spending is expected to turn in a decent showing in the third quarter after nearly stagnating in the second quarter.

The results of the manufacturing sector surveys of August do not bode well for industrial production, as they pointed to a contraction in activity. Industrial production growth may have seen a marked slowdown. Additionally, BMO Capital Markets noted that production may have been hurt by power outages and distribution delays in the Northeast, dragging down utility output. However, mining production is expected to have seen some strength.

After the abysmal performance in August, manufacturing conditions could have rebounded slightly in September. The Philadelphia and the New York Federal Reserves' surveys may have seen some improvement, although they are expected to stay put in contraction territory.

RTTNews