US economy stumbles despite stocks at 4-year high

WASHINGTON - US stocks on Tuesday hit a four-year high, but the economy continues to flounder amid what economists regard as one of the weakest recoveries in recent memory.

The S&P index soared to 1,426.68, the highest point since May 2008, before reversing course by day's end. A recent spate of positive numbers including housing sector figures, payrolls and retail sales boosted US stocks, in addition to the expectation that central banks will soon take action to bolster the economies worldwide.

But putting a damper on that news are expectations down the road, mirrored in the latest recommendation by investment giant Goldman Sachs, that investors should dump their stocks before the US plunges headlong into fiscal turmoil.

In a note to clients, the company's US head equity strategist David Kostin told clients to pull out of stocks, as he predicted that Congress would "fail to reach agreement in addressing the fiscal cliff", a possibility that "is greater than what most investors seem to believe based on our client conversations."

Indeed, tax cuts in dividends, capital gains and payroll are expected to expire at the end of the year, which could send the economy reeling amid already weak growth and massive joblessness.

"Last year, the deadline for Congress to raise the federal debt ceiling was known months in advance," Kostin said.

"Nevertheless, Congress was unable to reach an agreement that satisfied all factions. Investors were stunned and the S&P 500 plunged 11 percent in 10 trading days," he said.

The news comes as the economy continues its drudgerous slog toward recovery from the worst recession in decades.

This month saw the jobless rate climb back up to 8.3 percent from the previous month's 8.2 percent as the economy remains stubbornly above the 8 percent mark.

Since January labor market gains have been fast enough to keep pace with population growth, but not fast enough to put a dent in the nation's unemployment rate, said Gary Burtless, senior fellow at the Brookings Institution, adding that the number of unemployed and the jobless rate were virtually the same last month as they were in January.

Public-sector employment declined in July. Since May 2010 government payrolls fell in 23 out of 26 months, falling a total of 1.07 million, or 4.7 percent. If government employment had remained steady rather than shrinking, the current unemployment rate would be 7.6 percent rather than 8.3 percent, he said.

Recent shrinkage of state and local public payrolls has occurred in spite of a recovery in state and local tax revenues. "The continued weakness of government employment is at least partly the result of political hostility to maintaining the size of government," Burtless said.

The household survey, out earlier this month, offers a "less encouraging" picture of recent job market gains, he said.

Respondents reported that 195,000 fewer Americans were employed in July compared with June. Since January the household survey shows job gains that averaged 97,000 a month.

That is around the number needed to keep the unemployment rate from rising. "But it is too small to push the unemployment rate down," Burtless said. "The job market recovery from the Great Recession has been and continues to be exceptionally weak."