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In late August, markets got all excited about the larger-than-expected upward revision to second quarter GDP to 3.3 percent. Fed officials and numerous economists nonetheless stated they still expect a drop off in growth during the second half. The latest economic data indicate those forecasts to be on target. It may or may not be recession but the economy certainly is anemic.
 This past week, it was mostly quiet during the holiday shortened week – except on Thursday. Recession worries were fueled by mostly negative sales numbers from retailers and by a down ADP employment report. For the day, the Dow dropped 3.0 percent while the Nasdaq fell 3.2 percent. Worse-than-expected declines in sales by Abercrombie & Fitch and Saks among others more than offset an upside surprise from Wal-Mart. Concern over the consumer sector and the economy in general weighed heavily on the financial sector with Bank of America leading the Dow’s plunge. Friday’s negative jobs report initially pushed stocks down but equities ended the day mixed as a number of traders went bargain hunting.
Equities were down sharply this past week. The Dow was down 2.8 percent; the S&P 500, down 3.2 percent; the Nasdaq, down 4.7 percent; and the Russell 2000, down 2.8 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 15.4 percent; the S&P 500, down 15.4 percent; the Nasdaq, down 14.9 percent; and the Russell 2000, down 6.2 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields fell moderately this past week with a number of factors coming to bear. Sharply lower oil prices and a firming dollar lowered inflation expectations and helped to ease rates. Economic data also led traders to conclude that the economy is weaker than previously believed. Both the ISM manufacturing and ISM non-manufacturing reports were flat. Construction spending declined more than anticipated and the ADP employment numbers declined. Also, an upward revision to second quarter productivity and downward revision to unit labor costs improved the inflation outlook. Curiously rates actually edged up this past Friday despite payroll job losses and a spike in the unemployment rate – funds had a modest outflow from Treasuries and into equities on the last day of the week. But overall, the picture was clear that the economy has softened in the third quarter, easing interest rates.
 For this past week Treasury rates were down as follows: 3-month T-bill, down 3 basis points, the 2-year note, down 13 basis points; the 5-year note, down 18 basis points; the 10-year bond, down 16 basis points; and the 30-year bond, down 15 basis points.
Continued economic weakness has kept bond yields on a modest downtrend since mid-July. Traders increasingly believe that the economy will be sluggish enough to bring down inflation without the Fed having to tighten soon.
 Weak economic data and a slowly rising dollar pummeled oil prices this past week. But the biggest drop during the week came on Tuesday after it become more apparent over the extended weekend that Hurricane Gustav had done no more than minimal damage to oil facilities in the Gulf. The spot price of West Texas Intermediate fell almost $6 per barrel for the day. Prices dropped steadily throughout the week but got notable bumps down on Thursday and Friday. Thursday saw a negative ADP report, a rise in jobless claims, and a flat ISM for non-manufacturing – all of which weighed on oil. Friday’s jump in the unemployment rate pushed oil day at week end.
Net for the week, spot prices for West Texas Intermediate dropped a hefty $9.36 per barrel to settle at $106.23 – and coming in $39.06 below the record settle of $145.29 per barrel set on July 3. This is down 26.9 percent from the peak.
While the labor market has been in a downturn all year, it took a turn for the worse with a spike in unemployment. Other than an incentive induced jump in motor vehicle sales and old news on productivity, the economic news was flat at best and negative in general.
 The labor market worsened in August and could be pointing to a second half recession. The unemployment rate now is at its highest since September 2003. But first, nonfarm payroll employment in August fell 84,000, following a decline of 60,000 in July and a decrease of 100,000 in June. Payroll jobs have fallen for eight consecutive months.
The latest decrease was widespread. Manufacturing and construction jobs fell by 61,000 and 8,000, respectively. Service-providing jobs declined 27,000 after falling 12,000 in July. Revisions to overall payroll jobs in June  and July were a net decrease of 58,000.
Within service-producing industries, job weakness was led by a 53,000 drop in professional and business services – largely temp help. The next largest decline was in trade, transportation & utilities – primarily a 20,000 drop in retail trade. Modest decreases were seen in most of the other service-providing categories. The widespread weakness in services is what sets apart the latest jobs report. Previously, services weakness had been spotty.
On a year-on-year basis, nonfarm payroll employment slipped to down 0.2 percent in August from down 0.1 percent in July.
 Although the jobs market has softened, it has not yet shown up in wage growth. Average hourly earnings were up 0.4 percent in August – the same as for July. On a year-ago basis, wages were up 3.6 percent, compared to 3.4 percent in July.
Labor market weakness is becoming more apparent in unemployment. The civilian unemployment rate jumped to 6.1 percent from 5.7 percent in July and was worse than expected. August’s number is the highest since the 6.1 percent seen for September 2003. For August, the number of unemployed surged by 592,000, after a 285,000 rise in July. The household survey – which measure unemployment – is much smaller and more volatile than the payroll jobs survey. The number of unemployed is up 31.4 percent since August of 2007.
 The ISM manufacturing composite index was little-changed at 49.9 in August, compared to 50.0 the prior month and essentially at the break-even point. But production is doing a little better than employment. The production index came in with a mildly positive 52.1 reading while the employment index slipped to 49.7. New orders improved slightly but are still on the low side, at 48.3 versus 45.0 in July. Backlog orders are definitely a weakness at 43.5, up 5 tenths but still well below 50.
New export orders remain the biggest plus of the survey, at 57.0 for a three point gain and reflecting still strong foreign demand for capital goods. On the inflation front, the prices paid index eased a little on lower oil and other commodities prices, coming in at 77.0 and down from 88.5 in July.
 The non-manufacturing sector remained flat in August, posting an essentially break-even reading of 50.6 – but it was 1.1 points above July’s number. Key readings show little change and continue to hover near 50, a breakeven level that indicates no month-to-month change. New orders are the best news in the report, rising nearly 2 points but still under 50 at 49.7 to indicate that slightly more respondents reported a month-to-month decline than increase. Employment is the worst news in the report, down 1.7 points to 45.4 to indicate deepening contraction and pointing to trouble for tomorrow's employment report.
As with the manufacturing survey, prices paid eased but remained quite elevated. This index declined to 72.9 from 80.8 in July.
 The economy is getting even less support from the construction sector as the nonresidential component now appears to be joining the residential in contraction. Construction outlays fell 0.6 percent in July, following a rise of 0.3 percent in June. The July decline was led by private residential outlays which fell 2.3 percent. But private nonresidential outlays also declined - by 0.7 percent - while public expenditures rose 1.4 percent. Given worsening budget problems at the state and local government levels, we may see a softening in public sector construction outlays in coming months.
On a year-on-year basis, overall construction outlays were down 4.8 percent in July. The easing in construction spending points to weakness in not only the residential investment component in GDP for the third quarter but also for nonresidential structures investment.
 A big incentive push at General Motors fed the biggest month-to-month spike in unit sales in more than three years with total domestic- and import-made light vehicles at a 13.6 million rate, up 8.7 percent from the 17-year low of 12.5 million in July. The gain was centered in trucks where GM's month-to-month sales jumped nearly 40 percent. Though GM said consumers are now less wary over fuel mileage, the result of declining gasoline prices, other makers said consumers are focused as ever on fuel efficiency. Luxury sales were very poor in the month. Looking ahead, odds are that there will be a sharp fall off in motor vehicles sales in September. Also, the deep discounting by auto dealers will probably help core inflation numbers for August.
The upward revision to GDP filtered into a sharp upward revision to second quarter productivity and downward revision to unit labor costs. Second quarter productivity was raised to an annualized 4.3 percent, compared to the initial estimate of 2.2 percent and the market projection of a 3.3 percent gain. Meanwhile, unit labor costs were revised to a 0.5 percent annualized decline from the initial estimate of a 1.3 percent increase. The productivity and unit labor cost numbers much of the same source data as GDP.
 The latest revisions to productivity and unit labor costs were due to an upward revision in output and a slightly lower dip for hours worked. The numbers are good for near-term profits but unless there is a further reduction in labor input in coming quarters, the productivity and unit labor costs numbers will not be anywhere as good as the economy likely slows.
Year-on-year, productivity was up 3.4 percent in the second quarter, following a 3.3 percent gain the prior quarter. Year-on-year, unit labor costs in the second quarter came in at up 0.6 percent, compared to unchanged the first quarter. Compensation rose 4.0 percent on a year-ago basis – up from 3.3 percent in the first quarter.
The latest Beige Book from the Fed - prepared for the upcoming September 16 FOMC meeting – painted a dreary picture of the economy. It indicated further slowing in the economy with most Fed districts reporting business conditions as "weak," "soft," or "subdued." In contrast to recent reports, essentially all twelve districts reported soft conditions. Importantly, all districts reported tighter lending standards a result of recent financial instability which has turned into a broad credit crunch. The Fed stated that consumer spending has slowed to focusing on buying just the essentials. Meanwhile, housing appears to be poised to contract further as the regional Fed banks reported that loan demand for mortgages has fallen.
The Beige Book described manufacturing as “weak or declining” in most Districts although a few regions showed modest improvement. Exports were providing support to manufacturing but even export growth is slowing. Commercial real estate activity declined or remained weak in all but one District. Essentially, the Fed report indicates that the economy is headed to another round of flattish growth.
On the inflation front, all Districts reported price pressures from elevated costs of energy, food, and other commodities, although some have seen declines or slower increases in prices for several industrial commodities and energy products. More businesses are raising selling prices due to higher costs. But wage pressures are still seen as “moderate” due to the pullback in hiring. Labor market conditions were reported as “unchanged or somewhat softer.”
The bottom line is that the regional Fed banks are indicating that the outlook for near-term economic growth is not good. The implications include that it is going to take some time for credit market problems to fully resolve. The key consumer and housing sectors are likely to be sluggish in coming quarters.
But the Fed will be getting its wish for slower growth that may help bring inflation down. But it will be a balancing act to see if the improvement in inflation is soon enough without raising rates late this year or early 2009.
The August employment report clearly shows a weakening in the economy after a second quarter resurgence in the overall economy. Manufacturing and non-manufacturing surveys report flat conditions while construction deteriorates. And the Beige Book corroborates that growth has fallen. Is the economy in recession – especially with the further decline in employment' While it is possible for the overall economy to squeeze out incrementally positive growth with employment posting modest declines, the latest numbers suggest that the consumer sector is likely to retrench and could nudge the economy into recession. But it is still likely to be a close call.
This coming week, we get some variety for the market moving indicators. Exports have been supporting manufacturing and we get an update on international trade on Thursday. Friday sees a double header with retail sales giving us the status of the consumer sector and the producer price index likely giving us one of the first readings on whether lower oil prices are damping inflation.
Consumer credit surged $14.3 billion in June for the largest monthly gain since November. Surprisingly, the gain was centered in non-revolving credit which rose $8.9 billion for the largest jump since August. Car sales were unusually weak in June and even weaker in July, definitely pointing to lower non-revolving levels ahead. June's gain likely reflects gains in non-auto personal loans. July’s number likely will reflect the winner of the cross currents of a dip in auto loans (at least until August) and consumers’ increased reliance on credit cards to get by.
Consumer credit Consensus Forecast for July 08: +$8.8 billion
Range: $5.7 billion to +$10.0 billion
The U.S. international trade gap unexpectedly shrank in June despite a jump in the oil deficit. The narrowing was due to both a jump in exports and weaker consumer and business demand in the U.S. The overall U.S. trade gap fell to $56.8 billion from a $59.2 billion deficit in May. In June, exports jumped 4.0 percent while imports rose only 1.8 percent. The oil gap jumped to $36.4 billion in June from $32.8 billion in May, while the nonoil goods deficit fell to $32.2 billion from $38.0 billion in May. Looking ahead, we may see some modest bounce back in non-oil imports as they were unusually weak in June but given continued sluggishness in the economy, import growth outside of oil is still likely soft. Oil prices were still rising into early July and we are likely to some further rise in the monthly average price for oil imports. However, a decline in physical quantities of oil imported may restrain any expansion of the oil deficit. It is likely too early for a stronger dollar and slower growth abroad to have impacted export growth in July – but look for softness in coming months.
International trade balance Consensus Forecast for July 08: -$58.0 billion
Range: -$61.0 billion to -$56.0 billion
Import prices extended their run of increases in July though at a slightly less severe monthly rate of 1.7 percent, down from four prior months of increases near or above 3 percent. The year-on-year rate however continued to extend into record territory, up 21.6 percent vs. 21.1 percent in June. The easing month-on-month rate reflects less severe increases for petroleum imports, up 4.0 percent vs. four straight months of high single digit readings. Excluding petroleum, import prices rose a monthly 0.9 percent in July. For August we may actually see a decline in the overall index due to lower oil and other commodity prices. But we are also likely to see gains on the high side for consumer goods and capital equipment as the recent rise in the dollar has not had time to impact prices.
Import prices Consensus Forecast for August 08: -1.7 percent
Range: -3.3 to -0.8 percent
Initial jobless claims jumped 15,000 in the week ended August 30 to a much higher-than-expected level of 444,000 though the four-week average did slip back 3,250 to 438,000. Continuing claims for the August 23 week indicate that ongoing conditions in the labor market are weak with a 6,000 increase to another multi-year high of 3.435 million.
Jobless Claims Consensus Forecast for 9/6/08: 440,000
Range: 430,000 to 454,000
The U.S. Treasury monthly budget report in July widened to $102.8 billion and was up sharply compared to a deficit of $36.4 billion in July last year. The year-ago comparison underscores the severe erosion underway in the nation's budget -- hit by lower receipts and rising outlays. Some of July's increase was tied to special factors including $14 billion in tax rebates with another $15 billion -- in an interesting factor -- for payments to cover deposits of failed financial institutions (FDIC). Year-on-year, July receipts are down 5.8 percent with outlays up 27.2 percent. Looking ahead, the month of August typically shows a moderate deficit for the month. Over the past 10 years, the average deficit for the month has been $50.9 billion and $70.1 billion over the past 5 years.
Treasury Statement Consensus Forecast for August 08: -$107.0 billion
Range: -$126.9 billion to -$100.0 billion.
The producer price index remained red hot in July, posting a 1.2 percent increase, following a 1.8 percent surge in June. Even the core PPI rate jumped 0.7 percent, surging beyond June's 0.2 percent increase. The headline number was led by energy but the core was boosted by a number of components. Looking ahead, recent declines in oil prices likely trickled down to the PPI and should pull the headline number down. Also, heavy discounting by auto dealers probably helped ease the core rate as well as the overall PPI. But don’t forget the detail – the Fed will be looking to see if weakness is isolated and whether other components are still showing upward pressure.
PPI Consensus Forecast for August 08, m/m: -0.5 percent
Range: -1.2 to -0.1 percent
PPI Consensus Forecast for August 08, y/y: +9.9 percent
Range: +9.5 to +10.3 percent
PPI ex food & energy Consensus Forecast for August 08, m/m: +0.2 percent
Range: 0.0 to +0.4 percent
PPI ex food & energy Consensus Forecast for August 08, y/y: +3.6 percent
Range: +3.5 to +3.7 percent
Retail sales in July were modestly healthy outside of autos, which declined. Overall retail sales slipped 0.1 percent in July, following a 0.3 percent rise the month before. Excluding motor vehicles, retail sales posted a moderate 0.4 percent gain in July, after a 0.9 surge in June. Higher gasoline sales were one of the stronger components, but other components were still positive overall. When excluding both motor vehicles and gasoline, sales rose 0.3 percent, after increasing 0.4 percent the month before. Looking ahead, there are cross currents for the headline number. The auto component will likely be up due to a surge in unit new motor vehicles in August. However, a decline in gasoline prices will be pushing down on overall sales. Outside of these two major components, weekly store sales indicate soft numbers.
Retail sales Consensus Forecast for August 08: +0.3 percent
Range: -0.2 to +1.1 percent
Retail sales excluding motor vehicles Consensus Forecast for August 08: -0.2 percent
Range: -0.5 to +0.2 percent
Business inventories jumped 0.7 percent in June for the largest monthly rise since November.
Inventories at factories jumped 1.0 percent in June while inventories at wholesalers jumped 1.1 percent. But retailers have been tight fisted with stocks as retail inventories slipped 0.1 percent. Department stores and auto dealers in particular have been slashing inventories, with inventories falling 0.8 percent and 0.5 percent, respectively, in June. With further slowing in consumer spending, businesses are likely to have pulled back on inventories in July.
Business inventories Consensus Forecast for July 08: +0.5 percent
Range: +0.3 to +0.9 percent
The Reuter's/University of Michigan's Consumer sentiment index show consumer expectations coming off bottom, albeit cautiously. The Reuters consumer sentiment index in August rose nearly 2 points from July to 63.0. The expectations component rose more than the overall index but came off a very low base, jumping to 57.9 from 53.5 in July. The current conditions component slipped to 71.0 in August from 73.1 in July. There was modest good news on the inflation front as one-year expectations slipped 3 tenths to 4.8 percent, reflecting recent declines in gasoline prices. While July’s report was encouraging in that overall sentiment may have bottomed, the index remains near record lows.
Consumer sentiment Consensus Forecast for preliminary September 08: 64.0
Range: 63.0 to 65.0
Econoday Senior Writer Mark Pender contributed to this article.
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