US STOCKS-Wall St gains on recovery bets, but cautious

                                
   * Economy shrinks for 4th straight qtr, but at slower rate
                                
 * Disney drops after earnings, broker downgrade
                                
 * Dow up 0.5 pct; S&P 500 up 0.4 pct; Nasdaq up 0.5 pct
                                
 * For up-to-the-minute market news click [STXNEWS/US]
 (Updates to mid-morning)
                                
 By Ellis Mnyandu
                                
 NEW YORK, July 31 (Reuters) - U.S. stocks edged higher on
Friday after the government reported the economy shrunk at a
slower-than-expected pace in the second quarter, which
investors took as a sign the recession is easing.
                                
 Trading was volatile after the government report also
showed a drop in consumer spending, a crucial driver of
corporate profits and economic activity. (For story, see
[ID:nN31416560])
                                
 Even so, investors snapped up shares of big manufacturers
such as 3M Co <MMM.N>, which was up 1 percent, and big-cap
technology companies, including Apple Inc, <AAPL.O> which
gained 1.2 percent.
                                
 "Overall, the numbers weren't as bad as what the headlines
showed, and once you start going through the numbers, we're
headed in the right direction," said Alan Lancz, president of
Alan B. Lancz & Associates Inc, an investment advisory firm in
Toledo, Ohio.
                                
 "The worrisome factor is the consumer and what a big part
of our economy the consumer is, and we don't see any kind of
rebound there.
                                
 The Dow Jones industrial average <.DJI> climbed 42.47
points, or 0.46 percent, to 9,196.93. The Standard & Poor's 500
Index <.SPX> gained 3.48 points, or 0.35 percent, to 990.23.
The Nasdaq Composite Index <.IXIC> rose 9.76 points, or 0.49
percent, to 1,994.06.
                                
 A positive close on Friday would give the benchmark S&P 500
its fifth straight monthly advance.
                                
 Travelers Cos Inc <TRV.N>, one of the largest U.S. home,
auto and commercial insurers, was among the standouts following
positive broker comments, a day after the company raised its
forecast for the year. [ID:nWNBB6634] [ID:nN29275022] Its stock
jumped 2.8 percent to $43.11.
                                
 Shares of companies seen as better able to withstand an
uncertain economy also advanced, with Merck & Co Inc <MRK.N> up
1.4 percent at $30.34.
                                
 On the downside, Walt Disney Co <DIS.N> shed 2.4 percent to
$25.60. The media and entertainment powerhouse reported a 26
percent slide in quarterly earnings late Thursday as the
recession continued to hurt advertising and consumer spending.
[ID:nN30376974]
                                
 Even though Disney beat expectations by a hair, its shares
were the Dow's top drag. JPMorgan downgraded the stock to
"underweight" from "neutral" on Friday. [ID:nBNG436715]
                                
 The GDP report showed consumer spending, which accounts for
about two-thirds of U.S. economic activity, fell at a 1.2
percent rate in the second quarter after rising 0.6 percent in
the previous quarter.
                                
 With the contraction in the second quarter, U.S. GDP has
fallen for four straight quarters for the first time since
government records started in 1947.
 (Reporting by Ellis Mnyandu; additional reporting by Leah
Schnurr; editing by Jeffrey Benkoe)