A broad range of reports on manufacturing, services, auto sales, payroll employment, and residential construction all point to a coherent picture of a major bounce in the economy shaping up for the third quarter. Indeed, IHS Global Insight is forecasting that real GDP growth will jump by a very solid 3.7% in the third quarter, marking a decisive turning point in the business cycle.

Last week, however, markets reacted to this good news with a round of profit-taking, an inevitable correction that was catalyzed by some renewed jitters about the banking sector, as the FDIC list of failed banks continued to grow.

Next week will be a relatively short week on the indicator front. The July trade balance is expected to widen on a jump in auto parts imports, but consumer sentiment is expected to rise in early September.

In other major events, President Obama plans to make a major keynote address to a joint session of Congress on the stalled healthcare reform bill on Wednesday.

Treasury Secretary Geithner will hold a press conference following the meeting of the G-20 finance ministers on Saturday, September 5, and will then will testify at TARP hearings on Thursday, September 10. Commercial banks have repaid about $100 billion of TARP funds, or about 40% of the total funds extended to the banking sector. This should defuse much of the shrill criticism that has been directed against the TARP program.

KEY U.S. DATA RELEASES THIS WEEK

Thursday, September 10 – Trade Balance (Jul.)

• IHS Global Insight: -$30.3 Billion
• Consensus: -$27.0 Billion
• Last Actual: -$27.0 Billion (Jun.)

What to Look For

• We expect the trade deficit to widen to $30.3 billion in July, from $27.0 billion in June.

Implications

Both export and import volumes should increase, signaling a welcome revival in world trade activity. But we expect that export growth will be restrained by a decline in aircraft exports, while import growth should be boosted by an influx of autos and parts as domestic vehicle production ramped up. As a result, imports will likely bounce more than exports, and the deficit should widen.

Friday, September 11 – Michigan Consumer Sentiment Index (Preliminary Sep.)

• IHS Global Insight: 68.0
• Consensus: 67.8
• Last Actual: 65.7 (Final Aug.)

What to Look For

The Reuters/University of Michigan's Index of Consumer Sentiment is expected to rise from 65.7 in August to 68.0 in early September.

Implications

Sentiment is expected to be buoyed by stock market gains in August and signs that the U.S. economy is now recovering. Since April, the sentiment index has fluctuated in a range of 65 to 71, which is characteristic of weak spending. We do not expect that consumer sentiment will break out of this range until job growth resumes next spring. Meanwhile, consumer spending is likely to show only sluggish growth and be a relatively weak contributor to the initial recovery.