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Will they or won’t they' Will Congress agree on what sort of rescue plan will be enacted for the financial markets' That was the unanswered question as of this writing on early Friday evening. This past week was quite event filled. Starting the week was a late Sunday night announcement by the Fed, approving separate requests by investment banks Morgan Stanley and Goldman Sacs to become bank holding companies – to bolster confidence in those institutions. At the start of the week, the Treasury announced a $700 billion plan for the Treasury to buy up toxic assets (primarily – but not entirely – mortgage backed assets) and replace them with liquid Treasury securities.
Fed Chief Ben Bernanke and Treasury Secretary Henry Paulson testified before congressional committees on Tuesday and Wednesday on behalf of the proposal. Bernanke bluntly stated that the economy would contract if the proposal is not enacted. Also on Wednesday, the Fed bolstered liquidity in the credit markets by approving up to $30 billion in currency swaps for certain European central banks.
Congressional leadership announced during the day on Thursday a tentative agreement to enact the Treasury proposal but the agreement fell apart Thursday night as some members of the House wanted stronger protection for taxpayers. Wrangling over the details continued all day Friday but rumors increased late in the day that progress was being made.
Also, on Thursday evening, the FDIC announced the closing of Washington Mutual, resulting in the largest bank failure in U.S. history. JP Morgan has taken over the banking assets of Washington Mutual, paying the FDIC approximately $1.9 billion for ownership. At week end, rumors were flying that Wachovia was seeking a takeover by a stronger institution.
 Equities were down for the past week, weighed upon by growing concerns about a seizing in the credit markets and the worsening condition of a number of banks, including the failure of Washington Mutual. Equities were depressed the first part of the week also by the realization of the gravity of credit market problems as outlined by the Treasury and the Fed. Only later in the week – primarily Thursday – did guarded optimism about likely enactment of the Treasury’s rescue plan boost stocks. Small caps were hurt more than blue chips as (other than financials) the blue chips were seen as less risky. Also not helping equities were worse-than-expected economic news with drops in durables orders, new home sales, and existing home sales. Techs also were pulled down by negative news from Research in Motion on downgrades in revenues.
Equities were down this past week. The Dow was down 2.2 percent; the S&P 500, down 3.3 percent; the Nasdaq, down 4.0 percent; and the Russell 2000, down 6.5 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 16.0 percent; the S&P 500, down 17.4 percent; the Nasdaq, down 17.7 percent; and the Russell 2000, down 8.0 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Yields on Treasury securities were mixed this past week. Shorter maturity yields came under heavy pressure the first three days of the week after credit markets tightened further on news that the Fed and Treasury saw conditions in the credit markets as so severe that a $700 billion rescue plan was needed. Flight to quality even accelerated on Wednesday despite the Fed’s injection of liquidity with the approval of currency swap lines with certain European central banks with up to $30 billion made available by Wednesday’s Fed action.
Short-term rates backed up somewhat on Thursday and Friday on expectations that some version of the Treasury’s rescue plan would be enacted before Congress closes the session – with legislators wanting to leave for home as early as Monday of this last partial week in September. Nonetheless, flight to quality was still keeping rates low – especially for the 3-month T-bill which remained well below 1 percent all week. Also adding to softness in rates for the week net were worse-than-expected economic reports on durables orders, existing home sales, and new home sales.
 The fears over lending cannot be overstated. The too-big-to-fail policy has been discarded by the Fed and by others. With so much in toxic assets being held by so many institutions, there has been a massive increase in perceived counter-party risk. There is the fear that the borrower might go under – and recent failures or takeovers of a number of financial institutions have added to those fears. The Treasury’s $700 billion proposal and the FDIC’s closing of Washington Mutual led to massive spikes in several measures of tightness in short-term lending on Thursday and Friday of last week. The difference between the 3-month LIBOR and the 3-month T-bill hit an all time high.
For this past week Treasury rates mixed as follows: 3-month T-bill, down 9 basis points, the 2-year note, down 6 basis points; the 5-year note, up 3 basis points; the 10-year bond, up 5 basis points; and the 30-year bond, down 2 basis points.
 This past week oil prices ended up only moderately despite a huge spike at the start of the week. On Monday, the spot price for West Texas Intermediate jumped $16.37 per barrel. The futures price jumped more than $25 during the day. Although a declining dollar (on news of the Treasury’s $700 billion rescue plan for the financial system) played a modest role in boosting oil, the real reason for the surge was technical. Monday was the last day of trading on the October oil futures contract and those in short positions had to engage in massive short covering during the last hour of trading. Oil fell almost as much on Tuesday as it rose on Monday.
Price movement was a lot tamer the rest of the week. But euphoria over Thursday’s congressional leadership announcement of an agreement on the Treasury rescue plan bolstered oil on the belief the economy would improve. But the collapse of those talks on Thursday evening and lack of progress on Friday led prices to dip on Friday.
Net for the week, spot prices for West Texas Intermediate rose $2.34 per barrel to settle at $106.89 and coming in $38.40 below (down 26.4 percent) the record settle of $145.29 per barrel set on July 3.
Economic data certainly took a back seat to the focus on the Treasury’s proposed rescue plan for the financial markets. But there was important news – especially on manufacturing and housing.
 As a final note on the second quarter, GDP growth surprisingly was revised down significantly. But the number will still look quite good compared to the likely figures in coming quarters. GDP was revised down to 2.8 percent from the prior estimate of 3.3 percent. The lower estimate for second quarter GDP was largely due to lower figures for personal consumption and in exports.
On the inflation front, the GDP price index was revised to an annualized 1.1 percent – compared to the previous estimate of 1.2 percent. Headline PCE inflation was revised to 4.3 percent – up slightly from the prior estimate of 4.2 percent.
 It is getting harder to find sources of strength in the economy as manufacturing more and more appears to be weakening. Durable goods orders in August dropped sharply, pointing to possible contraction in manufacturing. Durable goods orders fell 4.5 percent in August, following a 0.8 percent boost in July. Excluding the transportation component, new orders declined 3.0 percent, following a 0.1 percent gain in July. Weakness was led by aircraft and motor vehicles.
 Weakness in August was broad-based with declines in transportation, primary metals, machinery, fabricated metals, and electrical equipment. The only major category showing strength was computers & electronics.
Business investment in durable equipment is taking a hit from the slowing economy. Although a volatile series, nondefense capital goods orders appear to be on a downtrend. These orders fell 7.5 percent in the latest month, pulled down by a drop in aircraft orders. But even excluding aircraft, nondefense capital goods orders fell 2.0 percent in August.
Overall durables orders have fallen in three of the last five months.
 Although the primary cause of the current financial crisis has been the drop in housing, there still is no sign of a bottom. Existing home sales fell 2.2 percent in August to a 4.910 million unit rate. Condo sales dropped a sharp 8.2 percent but single-family sales were down a less alarming 1.4 percent.
The year-on-year rate is now down a mere 10.7 percent in August – due to the extended decline resulting in a lower baseline comparison. Since the 7.250 million unit peak in September 2005, sales have dropped 32.3 percent.
The glut of unsold homes, tight credit, and weak jobs market have weighed heavily on prices. The median price fell 3.4 percent in the latest month to $203,100, pushing the year-ago decline further down to 9.5 percent. The median price is down 11.5 percent from the peak of $229,500 set in June 2005. Specifically putting pressure on prices was a tide of distressed properties, sales of which make up 35 to 40 percent of total sales. Supply is still extremely high at 10.4 months.
 The new home segment of residential real estate is in even worse shape than the existing component – and the latest numbers were abysmal. New home sales plunged 11.5 percent in August to a 460,000 annual unit rate, a rate comparable to downturns in the early 1990s and early 1980s. But the population base is higher now, making today’s sales pace relatively worse than in these recessions. The year-on-year decline stands at 34.5 percent. But sales are down a whopping 66.9 percent from the 1.389 million unit pace for July 2005.
Supply at the current sales rate rose from 10.3 months in July to 10.9 months. Although down from the peak of 11.2 in March, it still is one of the very highest readings in nearly 50 years of data.
Prices fell a very steep 5.5 percent on the month to a median $221,900, resulting in a year-ago decline of 6.2 percent. The median price is down 13.7 percent from the peak of $257,000 set in April 2006.
 Despite all of turbulence on Wall Street and a softening jobs market, the consumer remains a little less pessimistic than a few months ago. There was some slippage in the improvement seen early in September, but consumer spirits managed to improve with the Reuters/University of Michigan consumer sentiment index coming in at a 70.3 reading, compared to 63.0 in August and a mid-month September reading of 73.1. Lower gasoline prices in most parts of the country likely played a role in the September improvement. Still, levels are relatively low.
While market attention was primarily focused on Washington’s attempts at rescuing the financial system and on the growing list of failed financial institutions, the economic data actually were quite important. As many economists have predicted, the economy is weakening from the moderately healthy growth of the second quarter. If the slowing is moderate, this will help with the Fed’s inflation fight in coming months. But without stabilization of the credit markets, the economy could be in for much worse. The past week’s economic data are additional reasons some version of the Treasury’s rescue plan needs to be enacted quickly.
On a final note, the fed fund futures market has priced in a 100 percent chance for a 25 basis point cut at the October 28-29 FOMC meeting – and a sizeable percentage expects a 50 basis point cut. However, a cut in the fed funds target would do next to nothing to unclog the pipes in the credit markets currently gummed up by toxic assets. It is the unclogging of the pipes that the Fed cares about.
This coming week has some heavy-hitter market moving indicators out, bracketed with personal income on Monday and a more-important-than-usual employment report on Friday. This will be the last employment situation report before the presidential election on November 4. Also this coming week, ISM manufacturing is out on Wednesday.
Personal income in July fell 0.7 percent, following a 0.1 percent rise in June. But weakness was related to a drop off in income tax rebates. Within personal income, the wages and salaries component posted a moderate 0.3 percent gain, following a 0.2 percent rise in June. Spending was moderated by a sharp dip in motor vehicle purchases. Personal consumption expenditures in July slowed to a 0.2 percent rise, after jumping 0.6 percent in June. Turning to inflation, the headline PCE price index remained quite hot with a 0.6 percent jump -- only slightly down from June's red hot 0.7 percent surge. The core PCE price index held steady but at a pace unacceptable to the Fed, rising 0.3 percent in both July and June. Looking ahead, the wages and salaries component may be sluggish but still positive as average hourly earnings were moderately strong in August even as the average workweek was flat and payroll jobs edged down. On inflation, a 0.1 percent decline in the headline CPI in August and a 0.2 percent rise in the core CPI suggest similar changes in the PCE price indexes.
Personal income Consensus Forecast for August 08: +0.2 percent
Range: -0.3 to +0.4 percent
Personal consumption expenditures Consensus Forecast for August 08: +0.2 percent
Range: -0.1 to +0.4 percent
Core PCE price index Consensus Forecast for August 08, m/m: +0.2 percent
Range: -0.1 to +0.3 percent
Core PCE price index Consensus Forecast for August 08, y/y: +2.3 percent
Range: +2.1 to +2.4 percent
The NAPM-Chicago purchasing managers' index jumped to 57.9 from 50.8 in July. The gain reflected large jumps in new orders – to 60.2 from 53.5 -- and production – to 63.4 from 49.2. Input prices remained elevated but a little less severely at 80.6 for a 10.1 point drop from July.
NAPM-Chicago Consensus Forecast for September 08: 53.0
Range: 49.0 to 57.5
The Conference Board's consumer confidence index popped solidly higher in August, reflecting declining gas prices but not improvement in current labor conditions. The Conference Board's index climbed to 56.9 in August from 51.9 in July and posted its largest one-month gain since July last year. Nonetheless, the level remains quite low.
Consumer confidence Consensus Forecast for September 08: 55.0
Range: 50.0 to 65.3
The Institute for Supply Management's manufacturing index was little changed in August, coming in at 49.9 versus 50.0 in July. Growth in production slowed slightly but remained in positive territory with a reading of 52.1. However, employment dipped fractionally to 49.7 from 51.9 in July. New orders and backlogs remained below 50 for the latest month. Prices paid continue to show severe pressure but did ease more than 11 points from July's astronomical reading of 88.5.
ISM manufacturing index Consensus Forecast for September 08: 49.5
Range: 48.0 to 51.1
Construction spending fell 0.6 percent in July, following a rise of 0.3 percent in June. The July decrease was led by private residential outlays which fell 2.3 percent. Private nonresidential outlays also declined -- by 0.7 percent -- while public expenditures rose 1.4 percent. Given recent weakness in starts, another slip in the residential component is likely in August. Also, weakening revenues for state and local governments could lead to soft government construction.
Construction spending Consensus Forecast for August 08: -0.5 percent
Range: -1.5 to 0.0 percent
Sales of domestic motor vehicles surged in August due to a big incentive push at General Motors. Total domestic- and import-made light vehicles jumped 8.7 percent to a 13.6 million rate 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. Sales of domestic-made vehicles jumped to a 10.3 million unit pace from 8.9 million units in August. However, sales in September are likely to decline, coming off the incentive program and with credit tightening.
Motor vehicle domestic sales Consensus Forecast for September 08: 10.08 million-unit rate
Range: 9.37 to 10.80 million-unit rate
Initial jobless claims for the week ending September 20 were badly skewed by Hurricanes Gustav and Ike as they jumped 32,000 for the week. The latest reading of 493,000 is essentially at a recession level. But excluding the impact of the two hurricanes, claims would be at a much less severe level of 430,000, according to the Labor Department. Continuing claims rose 63,000 to yet another multi-year high of 3.542 million. Both initial and continuing claims are being pushed higher by emergency efforts to extend benefits.
Jobless Claims Consensus Forecast for 9/27/08: 475,000
Range: 432,000 to 525,000
Factory orders rose 1.3 percent in July, following a 2.1 percent jump in June. New orders for durable goods were up 1.3 percent while new orders for nondurable goods rose 1.2 percent. More recently, in the advance report for durables in August, new durables orders dropped a sharp 4.5 percent, largely on declining aircraft orders. Lower oil prices likely will weaken the nondurables component for August.
Factory orders Consensus Forecast for August 08: -2.5 percent
Range: -6.0 to +0.5 percent
Nonfarm payroll employment in August fell 84,000, following a decline of 60,000 in July and a decrease of 100,000 in June. 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. On the inflation front, average hourly earnings posted a 0.4 percent gain in August. Average weekly hours were unchanged at 33.7 hours in August. The civilian unemployment rate jumped to 6.1 percent from 5.7 percent in July. The August number was the highest since the 6.1 percent seen for September 2003. The September jobs report will carry huge significance as it is the last employment report before the November 4 presidential election.
Nonfarm payrolls Consensus Forecast for September 08: -100,000
Range: -156,000 to -67,000
Unemployment rate Consensus Forecast for September 08: 6.1 percent
Range: 6.0 to 6.3 percent
Average workweek Consensus Forecast for September 08: 33.7 hours
Range: 33.5 to 33.8 hours
Average hourly earnings Consensus Forecast for September 08: +0.3 percent
Range: +0.1 to +0.4 percent
The composite index from the ISM non-manufacturing survey strengthened in August into positive territory, rising to 50.6 from 49.5 the prior month. Similarly, the business activity index, equivalent to a production index, rose more than 2 points to 50.6. Price pressures eased somewhat as the prices paid index declined to 72.9 from 80.8 in July.
Composite index Consensus Forecast for September 08: 50.0
Range: 43.8 to 51.9
Econoday Senior Writer Mark Pender contributed to this article.
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