By and  on October 29, 2009

Wall Street celebrated Thursday after the Commerce Department reported that government stimulus helped pull the U.S. economy out of a year of painful contraction and push up third-quarter gross domestic product up 3.5 percent.

While the news didn’t erase persistent doubts about the holiday season and beyond, it did advance the S&P Retail Index 2.5 percent, or 9.47 points, to 391.06, not far from its high for the year of 402.49, set on Monday. The Dow Jones Industrial Average added nearly 200 points, jumping 2.1 percent to 9,962.58, its biggest increase since July 15. However, the Dow failed to reclaim the 10,000 mark last seen on Monday.

The good news about GDP was accompanied by word of a 3.4 percent rise in personal consumption expenditures, even if they were mostly due to the summer’s Cash for Clunkers auto incentive.

“The recovery has started, but in its early phases it won’t feel like a recovery,” said Nariman Behravesh, chief economist at IHS Global Insight.

In addition to the auto program, tax incentives for first-time home buyers and rising inventories made the quarter appear stronger than it really was, Behravesh said. The government will also make two revisions on Thursday’s advance GDP estimate.

GDP growth is likely to remain positive in the next few quarters, but it will be less robust, Behravesh said.

Commerce Secretary Gary Locke said the report shows “we’re headed in the right direction.”

Retailers, who have spent the last year cutting payrolls and culling inventory, might also be seeing slight signs of improvement, but overall holiday sales are still expected to be about flat with last year’s dismal outing.

“If you have superior product, that consumer is starting to trickle back,” said Christine Chen, equity analyst at Needham & Co., pointing to recent positive financial guidance from J. Crew Group Inc. and Lululemon Athletica Inc.

“These are brands that have adjusted the assortment so that there’s more fashion, brought in more appropriate price points and have, I would argue, a competitive advantage,” she said. “Either it’s brand, it’s quality, it’s something.”

Higher-end consumers in particular are showing signs of life, she noted.

“As things stabilize, the consumer feels a little bit better about their situation,” Chen said.

For now, at least, the new reality includes much uncertainty on the job front.

Even though initial claims of unemployment insurance fell 1,000 last week to 530,000, according to the Labor Department, the job market seems set to weaken further. Unemployment is already at a 26-year high of 9.8 percent and many economists expect it will top 10 percent before stabilizing next year.

Investors, though, have poured into retail stocks in hopes that cost cuts will lead to better fourth-quarter earnings and gross margins even if sales are flat. Retailers riding the market up included Saks Inc., which rose 8.8 percent to $5.93; Nordstrom Inc., 5 percent to $32.19; J. Crew, 4.6 percent to $41.81; Lululemon, 4.5 percent to $26.24; Macy’s Inc., 4 percent to $18.37, and Coach Inc., 3.3 percent to $32.87.

On the supplier side, Revlon Inc.’s stock shot up 43.3 percent, more than any other New York Stock Exchange issue, to $8.24 after the company reported better third-quarter profits from continuing operations.

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