The economic news this past week pointed to the economy being closer to bottom of recession.  Housing starts posted a nice gain and manufacturing contracted more slowly than in prior months after special factors.  However, financial markets have been going back and forth in terms of judging how fast the economy is moving toward recovery.  When indicator news was not so great prior to this week, markets probably were rosier than they should have been.  This past week, the economic reports were relatively good on balance but markets decided that they had gotten ahead of the data.

Recap of US Markets

STOCKS

Most equity indexes were down for the week for the first time in five weeks.  And the Dow could not hold its grip onto positive territory for the year.  This past week, it was not bad economic news as the economic data on net were better than expected—especially for the all important housing sector and for the unemployed. 

How should equities have reacted'  The big news was a sizeable rise in housing starts for May.  That was partly offset by a decline in industrial production.  But more current manufacturing surveys from the Philly and New York Fed pointed toward further slowing in the manufacturing downturn.  Also, equities should have been more excited about low inflation numbers for the PPI and CPI which give the Fed more time to keep interest rates low.  At least equities did pop on Thursday on a large drop in continuing unemployment claims and on a spike in the index of leading indicators.

Overall, investors re-evaluated their views on how fast the economy is going to recover once the recession is over.  The general consensus—as seen in lower equities—is that investors had been a little too optimistic about pending growth.  The bottom line is that the recession is likely to end soon and now investors’ views on pending economic rebound are more in line with the economic data.

Equities were down this past week. The Dow was down 2.9 percent; the S&P 500, down 2.6 percent; the Nasdaq, down 1.7 percent; and the Russell 2000, down 2.7 percent.

For the year-to-date, major indexes are mixed as follows: the Dow, down 2.7 percent; the S&P 500, up 2.0 percent; the Nasdaq, up 15.9 percent; and the Russell 2000, up 2.7 percent.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

BONDS

Yields on Treasuries were mixed for this past week but with the long bond yield declining the most.  Yields eased at the start of the week on comments by the Russian finance minister that he backed the dollar and on comments by two Fed District Bank presidents indicated that they were not worried about federal deficits becoming monetized.  Yields fell notably on Tuesday after the Fed bought $6.45 billion of 3-year T-notes.

Also helping to ease yields were very soft PPI and CPI inflation reports and flight to safety as stocks fell sharply early in the week.   The only notable bump up in rates was on Thursday’s drop in continuing unemployment claims and jump in the index of leading indicators.

For this past week Treasury rates were mixed as follows: 3-month T-bill, flat; the 2-year note, down 6 basis points; the 5-year note, up 2 basis points; the 7-year note, up 1 basis point; the 10-year bond, down 1 basis point; and the 30-year bond, down 13 basis points.

OIL PRICES

At close of this past week, crude oil prices settled below $70 per barrel for the first time  in about 10 days.  Spot prices for West Texas Intermediate were down moderately for the week despite political turmoil in Iran, an important oil exporting nation. Comments by G8 officials indicated that recession still has a significant grip on many overseas economies.  A stronger dollar during most of the week helped ease oil prices as did very favorable PPI and CPI report.  The dollar and the inflation reports reduced the need to use oil as an inflation hedge.  Gasoline supplies were seen as higher than expected for the week.  Finally, oil followed equities down for the week, basically reflecting the view that traders had come to be a little too optimistic about pending recovery.

Net for the week, spot prices for West Texas Intermediate dropped $2.40 per barrel to settle at $69.55, coming in $75.74 below the record settle of $145.29 per barrel set on July 3, 2008 and below highs in recent days of just over $72 per barrel.

The Economy

Housing came in stronger-than-expected this past week while industrial production was down notably on weakness in utilities and mining. Manufacturing slipped also but the trend has been toward a slower rate of contraction.  Overall, the recession appears to be easing closer to bottom.  Meanwhile, inflation was quite soft.

Housing starts showing signs of moving up from bottom

It’s hard to tell when housing is at bottom.  There can be lots of zigzags in the data as you bounce along bottom. But housing may have hit bottom and begun a slow recovery.  Starts rebounded in May 17.2 percent, following a sharp 12.9 percent drop the month before. The comeback was led by the multifamily component which posted a 61.7 percent comeback after falling 49.4 percent in April. But the single-family component gained 7.5 percent, following a 3.3 percent rise the month before.

Why the rise in starts' Modest headway may be due to some easing in the months’ supply of new homes on the market.  Whether new construction continued to edge upward or not will depend on whether sales pick up and we’ll get updates on new and existing home sales this coming week.

Despite the latest good news, new housing construction has a long way to go to get back to full health. The May pace for total starts of 0.532 million units annualized was down 45.2 percent year-on-year.  For single-family starts, the year-ago pace was down 40.9 percent while that for the multifamily component was down 55.1 percent.

Industrial production continues to contract

National data on industrial production recently has been worse than from regional manufacturing surveys. But the greater weakness has been due to the utilities, mining, and auto sectors. Industrial production in May dropped 1.1 percent, following a 0.7 percent fall in April. However, the manufacturing component was not as negative, falling 1.0 percent after declining 0.6 percent the prior month. For the other major nonmanufacturing components, utilities in May fell 1.4 percent while mining output decreased 2.1 percent.

Overall, the largest source of weakness was motor vehicles & parts which plunged 7.9 percent after slipping 1.2 percent in April. Excluding motor vehicles, industrial production decreased 0.9 percent after a 0.7 percent fall in April. Manufacturing ex autos fell 0.6 percent in May, matching the prior month's decrease. The key point is that the underlying trend for manufacturing outside of autos is one of easing contraction. 

Philly Fed and Empire State hint at near bottom in manufacturing

The Philly Fed and Empire state manufacturing indexes headed in opposite directions in June but both were not far from break even. The Philadelphia Fed's business activity index jumped to minus 2.2 from minus 22.6 in May.  This was the highest level since plus 1.9 seen this past September.  Meanwhile, the Empire State survey’s general business conditions index fell back in June to minus 9.41 from minus 4.55 the month before. Both surveys indicate manufacturing is contracting far more slowly than during the second half of 2008 and early 2009.  Negative readings indicate continued month-to-month contraction but the level is tied to how fast or slow the rate of decline is.

CPI inflation is hard to find

Consumer price inflation has accelerated two months in a row to a red hot 0.1 percent monthly increase in May. OK, “red hot” is an exaggeration but the acceleration technically is still accurate as the headline CPI fell 0.1 percent in March and was unchanged in April ahead of May’s 0.1 percent uptick. The bottom line is that overall inflation currently is hard to find at the consumer level.

For the latest month, keeping the headline CPI soft was a 0.2 percent decline in food prices that helped to offset a 0.2 percent gain in energy costs.  The food at home index has fallen six months in a row.  Within energy, a 3.1 percent jump in gasoline prices was partially offset by declines in heating oil, electricity, and natural gas.

Meanwhile, core CPI inflation eased to a 0.1 percent rise in May, after jumping 0.3 the prior month. Helping to ease the core rate were declines in apparel and tobacco prices. Shelter components were sluggish with the indexes for rent, for owners' equivalent rent, and for lodging away from home all rising only 0.1 percent.

On a year-ago basis, headline inflation eased to down 1.0 percent (seasonally adjusted) in May from down 0.6 percent in April. Meanwhile, the core rate slipped to up 1.8 percent from up 1.9 percent the prior month. On an unadjusted year-ago basis, the headline number was down 1.3 percent in May while the core was up 1.8 percent.

A worrisome issue, however, is that energy costs are trending back up.  Unless oil prices stabilize, this could provide the backbone for a resurgence in inflation when recovery comes.

PPI inflation slows

As with CPI inflation, PPI inflation appears to be settling in at a modest pace for now. The overall PPI eased to a 0.2 percent gain, after rising 0.3 percent in April. Behind the slowing was a 1.6 percent drop in food prices after a 1.5 percent surge in April. Meanwhile, energy actually rebounded 2.9 percent, following a 0.1 percent dip in April. The core PPI rate posted a 0.1 percent decrease in May, following a 0.1 percent uptick the month before.

For the overall PPI, the year-on-year rate fell to minus 4.7 percent from minus 3.5 percent in April (seasonally adjusted). The core rate year-ago pace slowed to up 3.0 percent from up 3.4 percent the month before.

Leading indicators give hope two months in a row

The Conference Board's index of leading economic indicators clearly has been added to the list of green shoots.  This index jumped 1.2 percent in May, topping the 1.1 percent jump in April that ended a long run of declines. These gains suggest a bottoming of recession in the months ahead with recovery to follow.

While two gains in a row is good news, there are some caveats about the magnitude of strength. The latest month was led by a slowing in vendor performance.  Typically, this would be due to higher demand slowing delivery times. But some supply managers have warned that much of the tighter delivery conditions is due to cutbacks in shipping and warehousing. The boost to the leading index from the interest rate spread came about due to a rise in the yield on the 10-year Treasury note rather than from a drop in the fed funds rate. Basically, the steeper yield curve is a negative in reality. If these two components were excluded, the leading index would have risen a more moderate 0.6 percent—still a nice boost.

Also adding to the composite index gain in the latest month were real money supply, stock prices, consumer expectations, and building permits.  Partially offsetting were weekly hours and initial unemployment claims.

While the leading index got the most attention, the coincident index also is pointing to a bottoming of recession soon.  The composite index of coincident indicators slipped only 0.2 percent—less severely than down 0.3 percent in April and down 0.7 percent in March.  The coincident index has been on a slowing trend in the rate of contraction since January’s sharp 0.9 percent drop. 

The bottom line

The balance of economic news is showing that the worst of the recession is behind us and that the bottom is near.  The bad news, however, is that the recovery is still likely to be modest for some time.

Looking Ahead: Week of June 22 through 26 

The highlight this week will likely be the FOMC announcement on Wednesday even though almost no one expects an interest rate change.  Other market moving indicators include an update on durables orders, the final revision to first quarter GDP, and the personal income report on Friday.  Given the importance of the housing sector for recovery, the existing and new home sales reports will also get market attention.

Tuesday

Existing home sales rebounded 2.9 percent in April, after slipping 3.4 percent the month before.  The April sales pace of 4.680 million units annualized was nearly flat at minus 3.5 percent. Supply on the market was a negative in the report, rising to 10.2 months at the current sales rate compared to 9.6 months in March.  Looking ahead, pending home sales have risen three consecutive months, including a 6.7 percent boost in April.  Pending home sales tend to lead existing home sales by one or two months.  The first-time home buyer tax credit may be providing some lift to sales. 

Existing home sales Consensus Forecast for May 09: 4.85 million-unit rate

Range: 4.50 to 4.95 million-unit rate

Wednesday

Durable goods orders rebounded a revised 1.7 percent in April, following a 2.2 percent drop in March.  Excluding the transportation component, new durables orders gained a revised 0.4 percent after declining 2.8 percent the month before.  The rebound in new orders was broad-based.  Manufacturing surveys have been mixed on new orders. The ISM new orders index crossed into positive territory in May, rising to 51.1 from 47.2 the month before.  New orders indexes for the Philly Fed and New York Fed have been improving but remained just below break even in May and June.

New orders for durable goods Consensus Forecast for May 09: -0.5 percent

Range: -2.0 percent to +1.0 percent

New home sales in April nudged back up 0.3 percent after declining 3.0 percent the month before. New home sales came in at an annual 352,000 rate, down 34.0 percent on a year-ago basis. Supply, down 4.2 percent for the month to 297,000 units and the lowest level in eight years, came in at 10.1 months supply compared to 10.6 and 10.8 in the prior two months. Looking ahead, sales may get a boost from the first-time home buyer tax credit.

New home sales Consensus Forecast for May 09: 365 thousand-unit annual rate

Range: 340 thousand to 390 thousand-unit annual rate

The FOMC announcement for the June 23-24 FOMC policy meeting is expected to leave the fed funds target range unchanged at zero to 0.25 percent—a range remaining since being put in place at the December 2008 policy meeting. Market focus will be on comments in the statement about the status of the economy and whether there are any changes in the Fed’s goals for balance sheet purchases.  Lately, the Fed has been aggressive with its purchases of longer-term Treasuries, agency debt securities, and mortgage-backed securities.

FOMC Consensus Forecast for 6/24/09 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent

Thursday

GDP growth for first quarter GDP in the Commerce Department’s first revision was bumped up to a 5.7 percent annualized decline from the initial estimate of a 6.1 percent contraction. The upward revision was primarily due to less negative inventories and a smaller decline in exports. On the inflation front, the GDP price index was revised to an annualized 2.8 percent increase which was incrementally lower than the initial estimate of 2.9 percent. 

Real GDP Consensus Forecast for final Q1 09: -5.7 percent annual rate

Range: -5.9 to -5.5 percent annual rate

GDP price index Consensus Forecast for final Q1 09: +2.8 percent annual rate

Range: +2.8 to +2.8 percent annual rate

Initial jobless claims edged up 3,000 in the June 13 week to 608,000, a level reflecting a recent trend of slowing the rate of job losses. More importantly, continuing claims broke its string of record highs going back to early January. Continuing claims were down a sizable 148,000 to 6.687 million.

Jobless Claims Consensus Forecast for 6/20/09: 613,000

Range: 595,000 to 615,000

Friday

Personal income jumped 0.5 percent in April, following a 0.2 percent fall in March. However, the spike in personal income was led by an 8.6 percent surge in unemployment insurance benefits. In contrast, the wages and salaries component was unchanged, after a sharp 0.6 percent plunge in March. Consumer spending continued to retrench with a 0.1 percent dip in April.  PCE inflation was mixed with the headline PCE price index edging up 0.1 percent while the core PCE price index firmed to a 0.3 percent boost. Looking ahead, the wages & salaries component is likely to slip further as weekly earnings declined 0.2 percent in May. Spending should be up, however, based on a 0.5 percent boost in retail sales for May. Look for soft PCE inflation numbers—both the headline and core CPI rose only 0.1 percent for the month.

Personal income Consensus Forecast for May 09: +0.4 percent

Range: -0.2 to +1.3 percent

Personal consumption expenditures Consensus Forecast for May 09: +0.3 percent

Range: +0.1 to +0.6 percent

Core PCE price index Consensus Forecast for May 09: +0.1 percent

Range: +0.1 to +0.1 percent

The Reuter's/University of Michigan's Consumer sentiment index for mid-June edged only 3 tenths higher to 69.0. Expectations, which have been driving consumer measurements sharply higher for the last two months, actually fell back in this report, down 4 points to 65.4 for the first decline since February. But now the good news, the assessment of current conditions, which has been flat, jumped nearly 7 points to 74.5. Looking ahead, the consumer has had mixed news to soak in.  Initial jobless claims are down but unemployment is up due to higher continuing jobless claims.  The stock market has retreated modestly and gasoline prices are taking a bigger bite out of the budget.

Consumer sentiment Consensus Forecast for final June 09: 69.7

Range: 68.5 to 70.0

Econoday Senior Writer Mark Pender contributed to this article.