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Both chambers of the U.S. Congress finally approved legislation to bolster the financial markets – notably to gradually remove much of the toxic mortgage-backed assets on the books of many financial institutions. Given the spate of negative economic news, was the rescue in time'
While we did finally get enactment of legislation to rescue the financial markets, the road was quite bumpy. Monday afternoon, the House, led by a defiant Republican minority and joined by many Democrats wanting “sweeteners,” defeated the $700 billion mortgage-securities bailout of the financial industry. Unexpectedly, the vote really was not very close with 228 no votes to only 205 yes votes. In reaction, equities fell sharply with the Dow down a record 778 points.
The Senate – with less divisive membership and also with only one-third up for re-election compared to all 100 percent of the House – put together a modified rescue plan. Late Wednesday night, the Senate passed a financial rescue bill by a vote of 74 to 25. Then Friday afternoon, by a vote of 263 to 171, the House overwhelming approved the $700 billion mortgage-securities bailout, known as TARP for Troubled Asset Relief Program. The plan will help financial firms free themselves of mortgage-backed securities and should help restore confidence between lending parties. The House on Friday voted for the Senate version of the legislation. President Bush signed the legislation the same day as the House approval.
The Senate version of the legislation contained key provisions of the House version voted down on Monday. The legislation will allow the Treasury to spend up to $700 billion to buy troubled assets. Many financial experts say that if the Treasury is patient about holding the troubled assets and sell them when markets improve, that the taxpayer could actually make a profit. But the bottom line on the Treasury's purchases is that the taxpayer is likely at risk for only a moderate percentage of the $700 billion.
This key focus is important because taking toxic assets off bank and other financial institutions' balance sheets is critical to re-liquefying the credit markets. Among other changes to the original legislation, the bill also temporarily raises the FDIC insurance cap to $250,000 from the current limit of $100,000. The FDIC will be allowed to borrow from the Treasury if the FDIC does not have adequate funds to cover deposit losses.
The bill establishes two oversight committees – one including the heads of a number of regulatory agencies and the other of congressional leadership. The bill also authorizes the Fed to pay interest on reserve balances. This will give the Fed more control over the nation's money supply.
 Stocks ended the week down sharply despite congressional passage of rescue legislation for financial markets and President Bush’s signature on the bill. The failure of the House to pass rescue legislation on Monday led to record point losses for many indexes, included a 778 point drop for the Dow. For the day, the percentages were large but not daily records. On Monday, the Dow dropped 7.0 percent; the S&P 500, down 8.8 percent; the Nasdaq, down 9.1 percent; and the Russell 2000, down 6.7 percent.
Equity indexes generally recovered one-half or more of Monday’s losses on Tuesday on belief that the Senate would pass a rescue bill and that would prod the House. Indeed, the Senate passed a rescue bill late Wednesday night (after the end of the Jewish New Year at sunset to allow some key senators to return). However, stocks dropped sharply on Thursday due to a spike in jobless claims but mainly due to worries that the House would not pass the bailout legislation. After the House approved the rescue plan, equities initially continued to rise, reaching an intraday gain of over 300 points for the Dow. Traders had boosted the Dow by 200 points at the time of the vote, in anticipation of passage. But shortly thereafter, profit taking set in and equities closed down notably for the day, in part focusing on the reality of the economic news – notably the sharp drop in September employment released that morning.
Overall, equities markets overlooked most of the negative economic news of the week, focusing on the latest twists and turns in the road to passage of rescue legislation. But the economic data were grim and the bond market appears to have paid more attention to the numbers while still being impacted by congressional activity.
 Equities were down sharply this past week. The Dow was down 7.3 percent; the S&P 500, down 9.4 percent; the Nasdaq, down 10.8 percent; and the Russell 2000, down 12.1 percent.
For the month of September, major indexes were down as follows: the Dow, down 6.0 percent; the S&P 500, down 9.2 percent; the Nasdaq, down 12.0 percent; and the Russell 2000, down 8.1 percent.
 For the third quarter, major indexes were down as follows: the Dow, down 4.4 percent; the S&P 500, down 9.0 percent; the Nasdaq, down 9.2 percent; and the Russell 2000, down 1.5 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 22.2 percent; the S&P 500, down 25.1 percent; the Nasdaq, down 26.6 percent; and the Russell 2000, down 19.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields this past week were down sharply on flight to quality – primarily on Monday of this past week as funds flowed out of equities heavily. The failure of the House to pass rescue legislation that day left credit markets extremely jittery. Passage of the rescue legislation did not diminish flight to quality as yields eased further this past Friday. Also causing yields to dip was investor concern about the commercial paper market as many – especially Europeans – have left the market. Also, one congressman stated that he understood that a major insurance company was about to go under – increasing bond market and equity market jitters. Further damping rates were negative economic reports on flat consumer spending, a large fall in the ISM manufacturing index, weaker auto sales, higher jobless claims, and a sharp drop in payroll employment.
 For this past week Treasury rates were down as follows: 3-month T-bill, down 36 basis points, the 2-year note, down 53 basis points; the 5-year note, down 41 basis points; the 10-year bond, down 23 basis points; and the 30-year bond, down 26 basis points.
Flight to quality and liquidity has pushed the 3-month T-bill rate down to levels not seen since World War II. This past Monday, the 3-month T-bill closed at 0.29 percent.
 Crude oil prices were down net for the week. The sharpest drop in spot prices for West Texas Intermediate was on Monday as crude fell nearly $10.50 per barrel. The failure of the House to pass a financial rescue package was seen as leading to a nearly complete seizure of the credit markets, pushing the economy into deep recession. Keeping prices weak were negative economic reports, notably Thursday’s spike in unemployment claims and Friday’s sharp decline in payroll employment. These reinforced the view that demand will be slowing. Also weighing on oil prices was a strengthening in the dollar.
Net for the week, spot prices for West Texas Intermediate dropped $13.01 per barrel to settle at $93.88 – and coming in $51.41 below the record settle of $145.29 per barrel set on July 3.
Most financial news this past week focused on the movement and lack of movement of legislation to rescue the financial markets. Meanwhile, the economic news was gloomy – pointing increasingly toward recession.
 Based on the September employment report, the economy is headed into recession. Nonfarm payroll employment in September dropped another 159,000, following a decrease of 73,000 in August and a decline of 67,000 in July. Thus far, payroll jobs have fallen every month of 2008. The September fall was the worst since the 212,000 drop in March 2003. On a year-on-year basis, nonfarm payroll employment declined to down 0.2 percent in September from down 0.1 percent in August.
 The latest job declines were widespread. Manufacturing and construction jobs fell by 51,000 and 35,000, respectively. Rounding out the goods-producing sector, natural resources & mining rose 9,000 in September. Service-providing jobs declined 82,000 after falling 16,000 in August.
 Within service-providing industries, weakness was led by a 40,000 drop in retail trade and a 27,000 decline in professional & business services. Also falling were financial activities, transportation & warehousing, wholesale trade, information, and leisure & hospitality. On the positive side, education & health services advanced 25,000. Also posting modest gains were government and also other services.
The good news for the Fed is that the soft labor market is letting some air out on inflation pressures – at least from the labor cost perspective. Average hourly earnings eased to a 0.2 percent rise in September, following a 0.4 percent gain the month before. On a year-ago basis, average hourly earnings slipped to 3.4 percent from 3.6 percent in August. This is down from the cycle peak of 4.3 percent set in December 2006.
Turning to the household survey, the civilian unemployment rate held steady at 6.1 percent in September (rounded to one decimal place). The unemployment rate did not worsen in September on a rounded basis in part because even though household employment fell 222,000, the labor force declined 121,000. But going to greater decimal precision, the unemployment rate actually rose almost one tick but rounding in the latest two months hid that movement (from 6.055 percent in August and from 6.125 percent in September).
The September employment report was quite negative. The report provided additional cover for the U.S. House of Representatives to pass legislation to rescue the financial system. But the basic message is that the labor sector has fallen further into recession and that the overall economy likely also has met the technical definition of recession and no longer merely feels bad. Three key components of the Conference Board’s coincident indicator index are payroll employment, industrial production, and a variation of personal income. Payroll employment obviously was down sharply in September. A 1.0 percent drop in aggregate hours for manufacturing suggests industrial production also will be down. Also, personal income may not be negative (but it could be) but it will be close to flat and does not offset these other components as hours slipped and earnings were soft. Finally, business sales – the fourth component of the coincident index – are likely to be negative in September.
 Despite personal income posting a moderate gain in August, consumers are increasingly becoming cautious about holding on to their cash. Meanwhile, lower gasoline prices helped inflation to ease in August. Personal income in August rebounded 0.5 percent, following a 0.6 percent drop in July. Within personal income, the wages and salaries component posted a 0.4 percent increase, after advancing 0.3 percent the previous month.
 Spending was flat overall but there was large divergence by components. Personal consumption expenditures in August were unchanged, following a 0.1 percent uptick in July. A spike in auto sales led to a 1.4 percent jump in durables PCEs. Weak gasoline sales pulled down nondurables, which fell 0.6 percent. Services rose a mere 0.1 percent.
Importantly, monthly real PCEs point to a drop in third quarter personal consumption in GDP – further suggesting a possible negative number for the third quarter. Chain-weighted PCEs were unchanged in August but followed declines of 0.5 percent and 0.2 percent in July and June, respectively. The July and August levels are notably below the second quarter average. Given the September number for motor vehicle sales and the likely fall in gasoline sales from shortages in the Southeast, it is almost certain that the PCE component in third quarter GDP will be significantly negative.
On the inflation front, the headline PCE price finally eased on lower energy costs. The overall index slowed to no change, following hefty gains in July and June of 0.6 percent and 0.8 percent, respectively. The core PCE price index eased to 0.2 percent from 0.3 percent in July. The market had projected a core increase of 0.2 percent for the latest month.
Year-on-year, personal income growth rose to up 4.6 percent from up 4.5 percent in July. Headline PCE inflation slowed to up 4.5 percent from up 4.6 percent the month before. Core PCE inflation firmed to 2.6 percent from 2.5 percent in June. Both headline and core PCE price inflation remain above the Fed’s implicit inflation target range of 1-1/2 to 2 percent annualized.
 Vehicle sales were weak in September. Unit sales of North American-made vehicles fell 8.3 percent to an annual rate of 9.4 million, down from 10.3 million in August. For the latest month, light truck sales declined to a 5.2 million unit pace from 5.9 million in August while cars slipped to 4.2 million units from 4.4 million. Truck sales had been boosted in August due to special incentive programs – notably by GM. But these results will deepen concern of third-quarter recession.
 While consumer spending has been slipping, consumer confidence actually improved modestly in September – but from record lows. The Conference Board's consumer confidence index rose 1.3 points in September to 59.8 vs. an upwardly revised 58.5 reading in August (56.9 previously reported). The gain was led by a sizable 6.4 point gain in the expectations component to 60.5. Historically at the deepest depths of downturns, a rise in expectations points to overall improvement in the months ahead.
However, the September numbers did not cover the recent meltdown in the financial markets nor the latest unemployment report. Confidence likely was boosted by a decline in gasoline prices but we may see a dip in confidence based on the recent swoon in equities and its impact on household retirement savings.
Adding to the negative tone for manufacturing from the September jobs report was an unexpected decline in the ISM manufacturing index. The ISM manufacturing index fell more than 6 points to 43.5 in September from 49.9 in August. A move of this degree is very rare for this index which is historically very stable. Similar moves have occurred only during extreme times, such as after September 2001 or during recessions.
Commodity prices have been easing due to weak demand and this was confirmed in the prices paid index. This index plummeted to 53.5 from 77.0 in August.
 The good news for the ISM non-manufacturing index is that it is not in negative territory. In complete contrast with the manufacturing report, ISM's non-manufacturing report showed steady conditions in September. The headline composite index was little changed, slipping only 4 tenths to a 50.2 reading that is virtually at the dead-even 50 level. Basically, the services sector may not yet be in recession – even though manufacturing and construction are. The prices paid index was more stable – but this sector is less dependent on volatile commodities for input. The prices paid index edged down to 70.0 in September from 72.9 the month before.
 Construction likely is still headed down but paused in August – at least in current dollar terms. Construction outlays were unchanged in August, following a decline of 1.4 percent in the prior month. Strength in the latest month was primarily in public outlays, which rose 0.8 percent after a 1.3 percent boost in July. Residential outlays rebounded 0.3 percent after a 3.9 percent fall the prior month. But the private nonresidential component is showing new weakness, declining 0.8 percent in August, following a 1.1 percent decrease in July. While the overall number for August was better than expected, once the numbers are deflated, they will be negatives for the structures components of third quarter GDP.
A string of negative economic reports came out last week and it does not yet appear that markets have fully digested the implications – being distracted by congressional debate on a financial rescue. But the numbers are strongly pointing toward a third quarter contraction. While the rescue plan likely is a good idea, it will take time for the Treasury to take toxic assets off the market. Meanwhile, credit markets will remain tight. Certainly, the rescue plan will help to re-liquefy credit markets, but not soon enough to stave off a likely contraction in the near term.
This coming week is relatively quiet for market moving indicators. The only one is international trade, which is out on Friday. But also getting market attention will be the Tuesday release of the minutes of the September 16 FOMC meeting as traders try to confirm their belief that the Fed will be cutting rates at the next FOMC meeting.
The Minutes of the September 16, 2008 FOMC meeting are scheduled for release at 2:15 p.m. ET. In the FOMC statement issued on September 16, the Fed noted that “strains in financial markets have increased significantly.” Given the further tightening in the credit markets, traders will be looking for any language that hints at conditions that would lead the Fed to pull the trigger, lowering the fed funds rate further. But some regional Fed presidents have voiced opposition to further rate cuts, even stating that the Fed contributed to the current trouble by keeping rates too loose after the 2001 recession. The fed funds target rate now is 2 percent and the low after the 2001 recession was 1 percent.
Consumer credit growth slowed sharply in July to a $4.5 billion pace for the smallest rise of the year. The 2.1 percent annualized gain is also the lowest of the year. Growth in revolving credit during July was below trend at $3.9 billion while growth in non-revolving credit slowed to $0.6 billion to offset an $8.8 billion jump in June. The recent rise in savings, tied to tax rebates, may have limited the need for consumers to borrow temporarily. But the slower growth may reflect credit card limits being lowered by issuers due to the credit crunch and increased delinquencies. Markets need to think about the possibility that growth is slow not because consumers do not want to spend but because consumers do not have the same credit to access and this could slow economic growth.
Consumer credit Consensus Forecast for August 08: +$5.5 billion
Range: $0 billion to +$10.0 billion
Initial jobless claims remain at multiyear highs as the lingering effects of Gulf Coast hurricanes and further weakening in economic conditions have boosted the numbers seeking unemployment relief. The level of first-time claims nudged up by another 1,000 to 497,000 in the week ending September 27 from 496,000 in the prior week. The Labor Department estimates hurricane effects added 57,000 to the latest total. The 497,000 level for first-time claims is a multi-year high, going back further to before the recovery in the recession of 2001. But even excluding hurricane effects, the level of claims is high.
Jobless Claims Consensus Forecast for 10/4/08: 480,000
Range: 445,000 to 515,000
The U.S. international trade gap in July widened sharply on a surge in oil imports but otherwise actually improved. The overall U.S. trade gap jumped to $62.2 billion from $58.82 billion deficit in June. In July, exports advanced 3.3 percent while imports increased 3.9 percent. But the overall worsening was due to a spike in oil prices as the oil gap gushed to $43.4 billion in July from $37.3 billion in June. Meanwhile the nonoil goods deficit narrowed to $29.6 billion from $32.5 billion in June. But we are likely to see the oil gap shrink in August due to lower oil prices. But we also may be starting to see less vigorous exports as economies overseas have slowed significantly – some even posting negative growth.
International trade balance Consensus Forecast for August 08: -$59.0 billion
Range: -$64.5 billion to -$51.0 billion
Import prices fell 3.7 percent in August, the largest single drop in 20 years. Excluding a giant 12.8 percent plunge in petroleum, import prices fell 0.3 percent to end a long streak of 10 monthly gains.
Import prices Consensus Forecast for September 08: -2.5 percent
Range: -4.4 to -0.4 percent
The U.S. Treasury monthly budget report showed a deeper-than-expected $111.9 billion deficit in August. The fiscal year-to-date deficit was up 76 percent from this time last year, at $483.4 billion with two months still left in the government's fiscal year. Receipts were down 1.4 percent year-to-date, led by weakness in corporate taxes and individual taxes. At the same time, outlays were up 7.0 percent, led by an 11 percent jump in defense spending.
Looking ahead, the month of September typically shows a moderate surplus for the month. Over the past 10 years, the average surplus for the month of September has been $49.2 billion and $50.8 billion over the past five years.
Treasury Statement Consensus Forecast for September 08: +$68.5 billion
Range: +$30.0 billion to +$100.0 billion.
Econoday Senior Writer Mark Pender contributed to this article.
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