(Agencies)
Updated: 2007-12-31 21:01

Also Wednesday, the Institute for Supply Management releases its manufacturing index and the Commerce Department reports on construction spending. Economists polled by Thomson/IFR anticipate that manufacturing expanded very modestly in December, and that construction spending dipped in November.

On Thursday, the data schedule is light. Major automakers release their December sales figures, and home goods retailer Bed Bath & Beyond Inc. and seed company Monsanto Co. report their quarterly financial results.

But Friday should be a big day on Wall Street, when the Labor Department releases its December report on payrolls and unemployment.

The solid job market in 2007 gave many investors hope that the US economy can weather the worst housing market in decades without dipping into recession. Those investors will want to see signs that employment trend is holding up.

Economists forecast a smaller gain in payrolls in the last month of the year than in November, and they expect the unemployment rate to rise to 4.9 percent from the previous month's reading of 4.7 percent. A drop in payrolls or a bigger jump in unemployment could heighten concerns about consumer spending plunging, and anxiety about significant problems arising in the types of consumer debt that have seen fairly minor upticks in delinquencies and defaults - such as credit cards, auto loans and prime mortgages.

Even a reasonably firm job market could allow consumer spending to keep slowing, said Henry Herrmann, chief executive officer at investment management firm Waddell & Reed.

"The Christmas selling season showed us the consumer is feeling the effects of the credit and debt build-up over the last few years," Hermann said.

Another portion of the economy that Wall Street hopes will hold up in 2008 as it did in 2007 is the service sector, which has so far weathered the housing market's drop much better than manufacturing. The ISM releases its December index of non-manufacturing activity on Friday, and economists predict slightly weaker expansion than in November.

Market measures indicate that pessimism is fairly high right now, said Scott Wren, equity strategist for A.G. Edwards & Sons. That shows investors are already pricing in big problems ahead of the fourth-quarter earnings season - which could mean an eventual rise in stocks if the corporate profits and the economy don't weaken too much.

But market sentiment remains shifty.

"Early in the year, you're going to want to stay defensive," Wren said. "If the market's going to retreat at all, it's going to do it at the beginning of the year."

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