NEW YORK -- The stock market has been on the upswing, but few investors are relaxing just yet. This week's data on housing, retailers and labor costs will give Wall Street an idea of whether the economy is weakening or inflation is accelerating -- or both.
Wall Street had a case of the winter blues in January, and understandably. With banks reporting huge losses, uncertainty brewing about whether the economy is in recession, and Americans struggling to keep up with their debt payments, there was nowhere to go but down. The Standard & Poor's 500 index recorded its worst January since 1990.
But the stock market has bounced back -- last week, the Dow Jones industrial average jumped 4.39 percent, the Standard & Poor's 500 index added 3.75 percent, and the Nasdaq composite index rose 4.87 percent.
The Dow remains 10 percent below the record close
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of 14,164.53 it reached Oct. 9, but has recovered nearly 10 percent from the 15-month lows it hit in January.
There were many factors that helped buoy the market last week.
The Federal Reserve met the market's hopes for another big rate cut by slashing key rates a half-point. Banks and regulators indicated they are working to help out the distressed companies that insure mortgage-backed bonds. And Microsoft Corp.'s bid for struggling Internet provider Yahoo Inc. reassured Wall Street that although the credit markets are tight, deals are being pitched.
Recent government reports have not painted a rosy picture of the economy, but they haven't indicated the nation is in the midst of a deep recession, either.
The Labor Department's employment report last week showed a net job loss in January for the first time in four years, but a report from the Institute for Supply Management said the manufacturing sector expanded. The Commerce Department said personal spending is growing at the weakest pace in more than a year, but it also reported a solid gain in orders of big-ticket, durable goods.
The markets are angling for more rate cuts to stoke the economy, but what could tie the Fed's hands is inflation. High food, energy and health care costs are a reason consumers -- particularly homeowners with tough-to-pay mortgages -- are cutting back on discretionary spending. Those high prices may also be the only reason readings on personal spending are in positive territory.
The Commerce Department's index last week for personal consumption expenditures, a gauge of inflation, rose 0.2 percent in December from November levels. This week, the Labor Department reports on productivity and labor costs; the market is expecting labor costs to decline, and could be disappointed if they end up being higher.
"The worst of all possible worlds is stagflation," said Janna Sampson, director of portfolio management at Oakbrook Investments.
Stagflation happens when the economy weakens at the same time prices are rising. It's a problem that can't be solved with rate moves; rate cuts spur inflation but boost growth, while hikes control inflation but dampen growth.
Economists expect the Commerce Department's December factory orders index on Monday to tick up and the Institute for Supply Management's Tuesday report on January service sector growth to show a slight slowdown. They also expect the weekly ICSC-UBS chain store sales index on Tuesday to post a decline.
Meanwhile, the National Association of Realtors will release on Thursday its index on pending sales of existing homes, and economists predict a modest increase. And that same day, retailers will release their sales results for January.
-- BY MADLEN READ, THE ASSOCIATED PRESS