Stocks came off their morning lows after a report showed manufacturing activity in the Midwest shifted into expansion mode in July.
Stocks had tumbled at the opening bell after reports showed economic growth was weaker than expected -- even with the boost of the rebate checks -- in the second quarter and jobless claims shot up to their highest level in five years.
Manufacturing activity in the Midwest rose unexpectedlyin July, snapping a five-month run of contraction as new orders began to tick higher. The National Association of Purchasing Management-Chicago business barometer rose to 50.8 from 49.6 in June. Economists had expected the gauge to decline to 49. More importantly, the July reading kicks the indicator over 50, which signifies expansion.
A previous manufacturing report out of Milwaukee also showed a rebound in new orders, "so we now have to expect a small uptick in the national ISM report tomorrow," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients.
Tomorrow is a big day for economic news: In addition to the national manufacturing reading, we've got the July jobs report before the bell and July auto sales throughout the day.
Gross domestic product, the best gauge of economic growth, rose just 1.9 percent, the Commerce Department said in its first of three reports on second-quarter growth. It was certainly better than the first quarter's meager 0.9 percent growth rate, but economists had projected more robust growth of 2 to 2.4 percent, helped by the stimulus checks.
"This was actually a very good report," Joel Naroff of Naroff Economic Advisors, said of the GDP report. "Yes, it was below some consensus forecasts, but the key to that miss was the sharp change in inventories."
GDP is a lagging indicator and strategists weren't planning to give it much weight, given the skew of the rebate checks. The market was more troubled by jobless claims, which jumped by 44,000 last week to 448,000, the highest level since April 2003. Economists had expected a more modest 395,000 claims, according to Reuters.
Crude fell nearly $2, trading between $124 and $125 a barrel after a sharp jump in the previous session.
Oil had jumped more than $4 a barrel, settling above $126 a barrel on Wednesday, raising some concern that the recent decline was merely a blip.
But market pros said don't panic just yet -- it could just be a retracement after oil fell so far so fast.
"The fundamental factors have shifted dramatically in favor of lower oil prices," said Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, citing a tapering in demand from China after an initial runup for the Olympics.
"We wouldn't be surprised to see oil go as low as $100 a barrel -- or even lower," McCain said. But he cautioned that this retracement could push oil up a lot further before that happens.
McCain explained that a typical retracement is one-third to half of the recent decline, which would mean we could see oil back in the mid-$130s before we see $100 again.
Of course, oil giants posted blockbuster earnings but Exxon Mobil shares slipped as the oil giant's record $11.7 billion profit disappointed investors. Analysts noted that Exxon's results were hurt by sharp declines in production in most regions, and weak margins on gasoline.
Meanwhile, Marathon Oil shares rose after the oil refiner said it may split into two entities: oil and gas production, and refining and marketing.
Motorola reported earnings of 1 cent a share, beating analyst estimates, and boosted its 2008 outlook. Analysts said the handset maker sold more phones and held onto more market share than expected. Motorola shares jumped more than 7 percent.
ImClone shares shot up after Bristol-Myers Squibb offered to buy the biotech for $60 a sharein a deal that would give it full control of the cancer drug Erbitux.
Walt Disney beat earnings estimates and reported that park bookings were flat, an encouraging sign that cash-strapped consumers aren't cutting back on their expensive Disney vacations. However, Disney shares declined as investors worried about weakness in advertising salesand that the economic slump might soon hit the parks division.
Visa earnings topped forecasts, helped by an increase in fee revenuefrom international transactions. Mastercard also beat expectations but spending volume growth was weakin the U.S.
Starbucks posted a loss but its shares rose as the coffee chain offered details on its previously announced store closings.
Across the globe, Asian markets finished mostly higher, while European indexes were mixed as investors digested a huge amount of big-name earnings.
Deutsche Bank reported a huge drop in profit and $3.6 billion in writedowns.
Still to Come:
FRIDAY: Auto sales; Jobs report; construction spending; ISM manufacturing report; Yahoo annual shareholder meeting; Earnings from GM, Chevron
Send comments to cindy.perman@nbcuni.com.