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This past week, economic news suggested that the economic downturn may be easing heading into the second quarter. But it was not unanimous as a key report on the consumer sector raised serious questions about recovery. Meanwhile, company earnings largely topped expectations.
Simply Economics for May 8, 2009 will be available on the evening of May 10
 Equities posted another weekly net gain across most major indexes. The week, however, got off to a bad start after the weekend’s upgrade of the severity of the swine flu had been digested. Hospitality and tourism based companies saw equity prices fall. Also, pulled down were airlines and oil companies on concern that travel will be curtailed. However, healthcare shares rose as did GM on news of its plan to cut liabilities.
Tuesday saw a better-than-expected jump in consumer confidence but swine flu and stress test chatter weighed on the markets. However, the economic news did add to the view that the economy is declining less rapidly and played a role in market sentiment during the week.
The week’s net gain was largely due to a jump for equities on Wednesday. The economy and company news came into play. Real GDP’s headline number was weaker than expected. But markets picked through the detail and found positives with improved final sales – including a positive rebound in consumer spending. Also, the Fed’s FOMC statement indicated that the economy is declining less rapidly. By Wednesday afternoon, “less negative” had become the mantra of Wall Street. Earnings reports generally were good with DreamWorks and Goodyear topping estimates and Citigroup and Bank of American getting upgrades.
Chrysler’s actual filing of bankruptcy was taken in stride by markets and was largely expected. The company will continue to operate while under bankruptcy protection but is expected to downsize substantially. Chrysler’s good assets will be taken over by Fiat.
Markets dipped slightly on Thursday on another rise in continuing unemployment claims and a decline in personal income. Most equities were up on Friday on less negative economic news as consumer sentiment rose from near record lows and the ISM manufacturing index posted another gain within negative territory.
The energy sector was notably hit during the week on declining profits announced by Exxon and swine flu concerns. But, overall, less negative economic news was the big story of the week for equities.
 Equities were up this past week with most major index rising in seven of the last eight weeks. The Dow was up 1.7 percent for the week; the S&P 500, up 1.3 percent; the Nasdaq, up 1.5 percent; and the Russell 2000, up 1.7 percent.
Equities posted two consecutive strong monthly gains. The Dow was up 7.3 percent for April; the S&P 500, up 9.4 percent; the Nasdaq, up 12.3 percent; and the Russell 2000, up 15.3 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 6.4 percent; the S&P 500, down 2.8 percent; the Nasdaq, up 9.0 percent; and the Russell 2000, down 2.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were mixed this past week but notably up for longer maturities as more favorable economic news was the focus of credit markets. Better-than-expected numbers for consumer confidence on Tuesday lifted yields notably for longer-term Treasuries. The next day, favorable components in first quarter GDP and less negative news in the FOMC statement firmed these yields further. On Friday, the ISM manufacturing index and consumer sentiment index beat expectations and yields nudged higher. Also, investors are getting more comfortable with the idea of jumping back into equities to seek higher returns.
 For this past week Treasury rates were mostly up as follows: 3-month T-bill, up 5 basis points, the 2-year note, down 4 basis points; the 5-year note, up 9 basis points; the 10-year bond, up 18 basis points; and the 30-year bond, up 21 basis points.
 This past week, rate firming timed with better-than-expected economic news. The biggest rise in yields came on Tuesday with an improvement in consumer confidence, combined with coming off flight to quality on Monday’s swine flu concerns.
Over the past several weeks, short-term yields have been relatively steady. However, longer-term yields have been firming despite Fed purchases of longer-term Treasuries. Belief in an economy that is no longer worsening rapidly and looming supply of Treasuries have resulted in a slow uptrend in longer-term yields.
 This past week, crude oil prices drifted higher on more favorable economic news. Traders in the oil pits now see the worst of the recession as over and that demand will be picking up in coming months. Helping oil prices to firm were better-than-expected consumer confidence, consumer sentiment, and ISM manufacturing. Crude also was lifted by a less negative evaluation of the economy in the FOMC statement. Closing the week at $53.20 per barrel, the spot price of West Texas Intermediate has risen substantially since the recent low of $31.41 set for December 22, 2008.
Net for the week, spot prices for West Texas Intermediate rose $2.40 per barrel to settle at $53.20 – and coming in $94.49 below the record settle of $145.29 per barrel set on July 3, 2008.
While the first quarter was worse than expected, there are signs that heading into the second quarter the recession is easing somewhat. But there still are no significant signs of a rebound. And the consumer sector is not likely to provide much strength anytime soon – green shoots or not.
 First quarter GDP was supposed to have been a much softer contraction but its decline came within a hair of being as bad as that in the fourth quarter. Nonetheless, the detail indicates that the economy is not as bad as the headline number. The Commerce Department's initial estimate for first quarter GDP showed an annualized drop of 6.1 percent, and followed a 6.3 percent contraction the prior quarter. The first quarter was worse than the consensus forecast for a 5.0 percent decline.
But here is the key point -- the first quarter decrease was led by a $103.7 billion cutback in inventories. Manufacturers, wholesalers, and retailers were reducing stocks of goods due to weak demand and were cutting inventories at a faster pace than overall spending in the economy. That is, spending was not as negative as overall economic growth. This was seen in real final sales of domestic product falling only 3.4 percent in the latest quarter (GDP less change in private inventories) while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced). The bottom line is that spending is holding up better than the overall economy – turning less negative in the first quarter.
 Other GDP components were mixed. Other declines were seen in government spending, housing, and business investment. On the positive side, consumer spending picked up to a 2.2 percent gain after a 4.3 percent decrease in the fourth quarter. Net exports also improved. But one should not get too excited about the rebound in personal consumption – the newer personal income report was more negative on that front.
Turning to inflation, the GDP price index jumped 2.9 percent, after a 0.5 percent annualized increase the prior quarter. The gain was largely due to higher oil prices.
 The consumer sector has less ammunition to keep the economy afloat. Personal income in March fell further as consumer spending retreated from recent gains. Personal income fell 0.3 percent in March, following a 0.2 percent dip the prior month. But declines in the all-important wages and salaries component were even worse, dropping a sharp 0.5 percent, after falling 0.4 percent in February. Consumers tend to spend primarily out of wages and salaries, in contrast to dividend and interest income.
 And consumer spending turned negative again with a 0.2 percent decrease in March after gaining 0.4 percent in February. Weakness in the latest month was led by a 0.8 percent decrease in nondurables and a 0.9 percent drop in durables. Services rose a mere 0.1 percent. Prices had little net impact on nominal spending as real PCEs fell 0.2 percent in March – the same rate as current dollar PCEs.
Speaking of prices, PCE inflation was mixed as the headline PCE price index was unchanged, coming off a 0.3 percent jump in February. Meanwhile, the core PCE price index posted another 0.2 percent increase in March – the same as for the prior two months.
 The latest personal income report points to a trend that is not getting a lot of discussion but will have a big impact on the strength of recovery when it comes. The personal saving rate has spiked as a result of consumers trying to pay off credit card debt and rebuild retirement savings. The personal saving rate came in at 4.2 percent for March and is well above recent lows of near zero. For those interested, the recent high of 4.8 percent in May of 2008 reflected income tax rebates that to a large degree went unspent. The bottom line is that when employment and income do rebound, we likely are not going to get as large an impact on spending.
 Both consumer confidence and consumer sentiment have moved up from at or near historic lows. Pessimism appears to be easing a little as consumer confidence posted its biggest one-month jump in four years, to 39.2 in April from 26.9 in March. The biggest improvement was in the expectations component which jumped nearly 20 points to 49.5. This indicates that consumers see recovery ahead in coming months. But that optimism may be fragile as the current assessment of the jobs market showed no improvement with 47.9 percent saying jobs are hard to get, a reading that points to no let up in monthly payroll contraction.
Consumer sentiment also picked up in the final April reading,\ as the Reuters/University of Michigan index rose to 65.1 from a mid-month reading of 61.9 and a March reading of 57.3. Strength was in expectations, at 63.1 vs. 58.9 at mid-month.
Certainly, the improvement in both confidence and sentiment is good news. But there are caveats – levels are still very low. And improvement could reverse if the job market does not stabilize.
 It is not a truly positive number, but markets are focusing on less negative as being a positive and that is how the latest ISM manufacturing index can be described. The ISM index rose to 40.1 in April from 36.3 in March – still well below the breakeven point of 50. But the new orders index really improved, almost making the breakeven point. This index jumped 6 points to 47.2. Backlog orders also improved. Inventories, needed to fill the rise in existing orders, may now be in balance. Manufacturing is still contracting but not as fast as in recent months and there are signs of further improvement ahead.
 Although last week’s existing home sales report showed improvement in home prices in February and March, the more reliable Case-Shiller report still indicated that prices are on a downtrend – at least through February. The Case-Shiller composite 10-City home price index fell 2.1 percent in February while the 20-City index fell 2.2 percent. Most economists see the Case-Shiller index as a better measure since it is based on repeat transactions (comparing price changes for same houses) while new and existing home sales reports do not.
 The latest decline in Case-Shiller was led by prices decreases in Phoenix, Detroit, Chicago, Las Vegas, and San Francisco.
But nationally, year-ago home prices may no longer be declining more rapidly. The 10-city index came in at down 18.8 percent in February, compared to down 19.4 percent in January. The 20-city index stood at down 18.6 percent in February versus down 19.0 percent in January.
For the first time in quite a while, the FOMC decision was close to boring – something the markets, analysts, and policy-makers likely appreciated. The FOMC again kept its target rate unchanged at zero percent to a quarter percent and maintained its plan for quantitative easing as announced in recent FOMC meetings. The Fed left the discount rate unchanged at 0.50 percent.
Consistent with opinions already expressed in the Beige Book and by other economists, the FOMC made a modest upgrade for the economy, stating that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower." Nonetheless, the Fed sees a sluggish economy continuing with "economic activity is likely to remain weak for a time." There is an expectation that monetary and fiscal policy will lead to stabilized financial markets and economic recovery but no timetable was given. Also, inflation is expected to be subdued.
There was no change in the Fed's announced plan for expanding its balance sheet.
"As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets."
But at the end this past week, the Fed did make a separate announcement related to expanding its quantitative easing. The recently implemented Term Asset-Backed Securities Loan Facility (TALF) credit facility – that focuses on improving mortgage, consumer credit, and small business credit – will accept, starting in June, commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans as eligible collateral. Indeed, the Fed continues to be creative in bolstering the credit markets.
The recession continues – but there are further signs of a slowing in the rate of decline. However, the data on the consumer sector have been mixed. As has been stated by many for some time, this now is likely a U-shaped recession and recovery.
This coming week is relatively quiet in terms of market moving indicators except for the April jobs report out on Friday. This lack of news will likely lead the markets to have more time to fret over any news on the Fed’s stress tests for 19 major financial institutions in the U.S.
Construction spending in February fell again but not as much as expected. Construction outlays dropped another 0.9 percent in February, after plunging 3.5 percent in January. Weakness in February was led private residential outlays, which fell 4.3 percent. The single-family subcomponent dropped 10.9 percent while the multifamily portion slipped 2.1 percent. The other two major components actually made partial rebounds. The private nonresidential component rose 0.3 percent after a 4.3 percent drop in January. Public outlays rebounded 0.8 percent, following a 2.4 percent decrease the month before. Looking ahead, the drop in the level of housing starts on average over the last three months indicates that the residential component of outlays will likely continue downward in March, pulling down overall construction spending.
Construction spending Consensus Forecast for March 09: -1.0 percent
Range: -2.0 to -0.1 percent
The composite index from the ISM non-manufacturing survey in March fell back to 40.8 from 41.6 the month before. New orders also headed in the wrong direction with a nearly 2 point loss to a 38.8 reading. But there could be good news for April if the improvement in the Chicago PMI for April spreads. The Chicago PMI is a measure of both manufacturing and non-manufacturing for the Chicago region and it posted a gain to 40.1 from 31.4 in March. The numbers, however, were still in negative territory.
ISM Non-manufacturing Composite index Consensus Forecast for April 09: 42.0
Range: 40.8 to 45.0
Nonfarm productivity in the fourth quarter declined 0.4 percent annualized while unit labor costs jumped 5.7 percent. While both numbers are heavily dependent on much of the same source data for output as GDP, the hours worked data can lead to notable quarterly differences even if GDP growth is similar for two particular quarters. While GDP fell 6.1 percent in the first quarter – essentially the same as the 6.3 percent fall in the fourth quarter, we may see some improvement in productivity and labor costs due to cutbacks in hours worked.
Nonfarm Productivity Consensus Forecast for initial Q1 08: 0.0 percent annual rate
Range: -1.0 to 0.6 percent annual rate
Unit Labor Costs Consensus Forecast for initial Q1 08: +3.4 percent annual rate
Range: -0.8 to +5.7 percent annual rate
Initial jobless claims showed improvement in the latest week but continuing claims set another record high. Continuing claims in the April 18 week jumped 133,000 to 6.271 million, another record level and the 15th straight increase. A month-to-month comparison, useful for a gauge on the April employment report, showed significant deterioration, up 704,000 from 5.567 million at mid-March. But initial claims appear to have peaked in March, suggesting that continuing claims may plateau within a few months. Initial claims for the April 25 week slipped 14,000 to 631,000, down from 645,000 the week before.
Jobless Claims Consensus Forecast for 5/2/09: 635,000
Range: 625,000 to 650,000
Consumer credit outstanding fell $7.4 billion in February, nearly wiping out a sharp $8.1 billion climb in January. Revolving credit, down $7.8 billion, was behind the month's decline. Nonrevolving credit rose $0.3 billion. Importantly, the drop in consumer credit continues to raise question marks about how much the consumer can do to bring the economy out of recession.
Consumer credit Consensus Forecast for March 09: -$4.0 billion
Range: -$7.5 billion to +$6.0 billion
Nonfarm payroll employment has dropped for 15 consecutive months with March falling 663,000. More than 5 million jobs have been lost since the recession began in January 2008. The civilian unemployment rate jumped to 8.5 percent from 8.1 percent in February and was the highest since the same rate in November 1983. But labor market weakness has softened up wage inflation. Average hourly earnings came in at a monthly 0.2 percent in March with the year-ago wage increase easing to 3.4 percent from 3.6 percent in February. Looking ahead, we are likely to see another sizeable drop in payrolls if the run up in continuing unemployment claims is any indication. Over the past four weeks, continuing claims have jumped 607,000. This also suggests a notable boost in the unemployment rate for April.
Nonfarm payrolls Consensus Forecast for April 09: -630,000
Range: -810,000 to -580,000
Unemployment rate Consensus Forecast for April 09: 8.9 percent
Range: 8.5 to 9.0 percent
Average workweek Consensus Forecast for April 09: 33.2 hours
Range: 33.2 to 33.3 hours
Average hourly earnings Consensus Forecast for April 09: +0.2 percent
Range: +0.2 to +0.3 percent
Econoday Senior Writer Mark Pender contributed to this article.
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