Economy enters fourth quarter with questions

Wall Street is on surer footing than it was a month ago, but it enters the fourth quarter with many questions still unanswered about the health of the nation’s economy and corporations.

At this point, the credit markets have loosened up some, the Dow Jones industrial average is only about 100 points below its record, and investors appear to be more confident the Federal Reserve will do what it can to keep the economy from slipping into recession.

The third quarter, after all the tumult in the housing and credit markets this summer, ended with the Dow up 3.6 percent after the Federal Reserve lowered key interest rates.

However, not everything that keeps the stock market afloat is under the Fed’s control. The housing market is the weakest it’s been in years, and some homebuilders have said recently that they see conditions deteriorating through next year. Credit has improved, but the financial markets remain unsure how problems with spiking mortgage defaults and excessively leveraged debt will shake out.

“Everybody’s nervous. This housing thing is big, and it’s going to continue,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh, Pa.

This week will bring data not only on August’s pending home sales, but also on three major pillars of the nation’s economy: manufacturing activity, service sector activity, and employment.

Third-quarter earnings don’t arrive in earnest until mid-October, and the Federal Reserve isn’t scheduled to discuss interest rates until Oct. 30-31, so this week’s reports could help investors figure out where the economy is headed, if rates will keep falling, and whether corporate America is weathering the uncertainty.

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The Institute for Supply Management is expected to report Monday that manufacturing rose at a similar rate in September as in August, according to the median estimate of economists surveyed by Thomson Financial. An ISM report Wednesday, however, is expected to show that growth slowed in the service sector, which makes up a larger portion of the economy than manufacturing does.

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On Friday, the Labor Department is expected to report that the unemployment rate ticked up to 4.7 percent from 4.6 percent in September, after a surprising payrolls decline in August of 4,000.

Meanwhile, Wall Street will keep an eye out for corporate news this week.

Most companies are in a “quiet period” ahead of the earnings deluge in mid-October, but a few companies including Palm Inc. and Research in Motion Ltd. release quarterly results.

Also, investors will be watching for earnings pre-announcements. Housing-related and financial-services companies may issue warnings to investors if they anticipate losses, or if they had to write off or mark down a significant number of loans between July and September.