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This past week, there was increased evidence that the recession ended in July or will end shortly thereafter. But nearly all the news on the consumer sector points to a very subdued recovery in the near term. The consumer sector makes up about two-thirds of the U.S. economy and an anemic consumer sector will weigh on pending economic growth during recovery. And the Fed reached that conclusion before most participants in the markets, leaving monetary policy on hold for now. Yes, the consumer is still king of the economy for now. But based on unemployment, income, and debt, a pauper consumer is what is keeping recovery soft.
 Markets were a little thin this past week as many traders were squeezing in end-of-summer vacation. But equities closely tracked the economic news with the big hit coming on Friday. On Monday, a report on a jump in consumer bankruptcies pushed stocks down. Equities were down on Tuesday as some financial firms indicated that losses from consumer lending would be greater than earlier believed. Also, some traders worried about the Fed’s FOMC statement coming the next day. But equities bumped up on Wednesday as the FOMC statement upgraded the Fed’s view of the economy, noting that economic activity appeared to be leveling. The Fed also indicated that short-term interest rates would be low for an extended period. Stocks also rose on Thursday despite a very disappointing decline in retail sales. Good news from overseas boosted equities on reports of positive second quarter GDP growth for Germany and France. But it all came down to Friday’s consumer sentiment report. Stocks dropped sharply after consumer sentiment for mid-August fell significantly, reminding markets of how precarious the consumer sector is and that recovery is going to be very soft.
Equities were down this past week. The Dow was down 0.5 percent; the S&P 500, down 0.6 percent; the Nasdaq, down 0.7 percent; and the Russell 2000, down 1.5 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 6.2 percent; the S&P 500, up 11.2 percent; the Nasdaq, up 25.9 percent; and the Russell 2000, up 12.9 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 sharply this past week, reflecting a downgrade to the economy by bond traders. Nonetheless, rates slipped early in the week on flight to safety as equities fell early in the week. There was mild reversal of flight to safety on Wednesday as stocks rallied after the FOMC statement indicated continued low interest rates. But those in the bond pits acknowledged the weakness in the consumer sector sooner than equities traders. Yields fell sharply on Thursday after the unexpected drop in retail sales for July. Mid-maturity Treasury rates also declined on Friday after the reported decline in consumer sentiment.
For this past week Treasury rates were down as follows: 3-month T-bill, unchanged; the 2-year note, down 23 basis points; the 5-year note, down 31 basis points; the 7-year note, down 31 basis points; the 10-year bond, down 28 basis points; and the 30-year bond, down 18 basis points.
 A downgrade for the economy pushed down the price of crude oil this past week. The spot price of West Texas Intermediate oscillated during most of the week as economic news was mixed. Weakness in equities early in the week helped oil prices to ease. At mid-week, the Fed’s FOMC statement indicated a leveling off in economic decline, nudging oil prices up despite a gain in oil inventories. Stronger-than-expected earnings by Wal-Mart boosted crude on Thursday as did gains in second quarter GDP for both Germany and France. But all of the earlier news was forgotten after Friday’s release of consumer sentiment for mid-August showed a significant decline and oil prices fell in tandem.
Net for the week, spot prices for West Texas Intermediate dropped $3.30 per barrel to settle at $67.63 – and coming in $77.66 below the record settle of $145.29 per barrel set on July 3, 2008.
This past week, economic news was mixed—with one indicator actually suggesting the recession is over. But the consumer sector news generally was not good—indicating that the recovery is going to be choppy and sluggish. The Fed had come to that conclusion before the markets had and kept policy on hold—and easy.
 Probably the best news of the past week was in the manufacturing sector. Industrial production in July added to the argument that the recession is over, rebounding primarily on motor vehicle assemblies. Overall industrial production in July jumped 0.5 percent, following a revised 0.4 percent decline in June. The manufacturing component posted a 1.0 percent increase after contracting 0.6 percent in June. In the latest month, utilities dropped 2.4 percent while mining output rebounded 0.8 percent. Within manufacturing, the comeback was led by motor vehicles & parts which jumped 20.1 percent after slipping 2.4 percent in June. Auto manufacturers are finally boosting production after GM and Chrysler emerged from bankruptcy. Nonetheless, manufacturing ex autos rose 0.2 percent after a declining 0.5 percent in June.
Traditionally, when capacity utilization hits bottom and turns up, that is confirmation of the end of recession. That may now be the case—with emphasis on “may.” Overall capacity utilization in July improved to 68.5 percent, rising from a revised record low of 68.1 percent in June.
By industry group within manufacturing, durable goods jumped 2.2 percent in the latest month, the largest gain in almost four years and following a 0.7 percent fall in June. Within durables, transportation equipment output led the increase, jumping 9.4 in July. Also posting notable gains were primary metals, up 3.3 percent, and nonmetallic minerals, up 2.3 percent. Nondurables output actually slipped 0.1 percent after a 0.4 percent drop in June.
The latest industrial production report is another indication that the recession has ended. However, after discounting motor vehicles, the turnaround still appears to be sluggish.
 The June international trade report was good news for U.S. manufacturers but not for consumers. The overall U.S. trade gap widened to $27.0 billion from a revised $26.0 billion deficit the previous month. Exports advanced 2.0 percent while imports rebounded 2.3 percent.
The widening in the trade shortfall was due to a wider petroleum deficit which expanded to $17.2 billion from $13.3 billion in May. In contrast, the goods excluding petroleum gap shrank significantly to $20.0 billion from $22.6 billion in May.
 The jump in the oil deficit was not good news for consumers. Behind the boost in the petroleum gap were both higher oil prices and more barrels imported. Crude oil prices jumped to $59.17 per barrel from $51.21 the month before. The number of barrels that were imported in June rebounded 7.1 percent. We probably will see improvement in the oil deficit in July as crude prices dipped that month prior to the boost in August. More than likely, as Asian and other foreign economies improve—and probably at a stronger pace than for the U.S.—oil prices will continue to rise and boost the U.S. trade deficit.
But the good news in June was the 2.0 percent gain in exports. So which producers in the U.S. were happiest about the latest trade numbers' By end-use categories, the June advance in exports was led by industrial supplies (up $1.2 billion) and by capital goods ex autos (up $0.4 billion). Also posting gains were foods, feeds & beverages exports. Automotive was in the positive category but essentially was flat. Consumer goods exports edged down marginally.
Given the weak level for the dollar and pending economic recovery abroad, there likely will be continued—though probably choppy—increases in exports in coming months. That is good news for U.S. manufacturers.
 Some have repeatedly stated that the consumer sector is weighed down currently by a lengthy list of negative fundamentals—such as high unemployment, heavy debt, and lowered asset values. And equities appear to have not paid attention—until maybe now. Retail sales numbers are corroborating the weakness of the consumer sector. Overall retail sales slipped 0.1 percent in June, following a revised 0.8 percent boost the month before. The July decline came in well below the consensus forecast for a 0.8 percent advance. Excluding motor vehicles, retail sales dropped 0.6 percent, following a revised 0.5 percent rise in June. Weakness was led by gasoline sales which declined 2.1 percent in July, following a 6.3 percent jump the prior month. Excluding motor vehicles and gasoline, retail sales fell 0.4 percent, following a 0.1 percent dip the prior month.
Weakness was widespread in the components and the only good news is that special factors may have had roles in softening up consumer spending. There is some speculation that a shift in tax free days for back to school cut into July sales and will boost August numbers. Some also see the cash for clunkers program raising autos but taking away from other sales. This likely is true even if not based on dollars taken away but based simply on shopping time lost at other stores. Also, the auto sales numbers were not as strong as indicated by unit sales data and could be price related. Nonetheless, the July data were disappointing.
What are the implications from the latest sales numbers' The July decline in retail sales will lower economists’ forecasts for third quarter GDP and will likely lead some to hedge their claim that the recession is over. A key factor in deciding when the recession ends is business sales—which includes retail sales. But July’s numbers are complex when taking into account how auto sales are estimated (small sample of dealers) and that lower prices impacted at least two key components (autos and gasoline). We are likely to see better numbers for the durables and nondurables components in personal consumption expenditures when the personal income report comes out late this month. Durables will likely be stronger due to better estimates of auto sales. Also, we’ll see inflation-adjusted spending which should be moderately positive for June.
 Consumers in early August were increasingly glum about the jobs picture as consumer sentiment fell back. The Reuters/University of Michigan Consumer Sentiment Index dropped nearly 3 points at mid-month to 63.2. Weakness was centered in the current conditions component which fell to 64.9 from 70.5 at the end of July. Consumers were less optimistic about their role in recovery as the expectations component slipped to 62.1 from 63.2 in July. Increasingly, it looks like the consumer will be sitting on the sidelines during the initial phase of recovery. Other than for discounters such as Wal-Mart and low-end restaurants such as McDonald’s, investors may want to think about moving money into exporters and maybe even homebuilders instead of keeping money in consumer-dependent companies. Consumers will be sticking with the basics for a while.
 Lower gasoline prices and recession pummeled shelter costs weighed on the CPI in July. The headline CPI was flat in July after surging 0.7 percent the month before. Core CPI inflation slowed to a 0.1 percent uptick in July after rising 0.2 percent in June.
Helping to soften the July headline number was a decline in energy costs which dropped 0.4 percent after a 7.4 percent hike the month before. Gasoline prices fell 0.8 percent after a 17.3 percent spike in June. Meanwhile food price inflation fell 0.3 percent.
 However, the big news was in the shelter subcomponent of housing which has been hurt by weakened demand from the recession. Shelter costs decreased 0.2 percent, following a 0.1 percent rise in June. Both rent and owners’ equivalent rent were unchanged in the latest month. But those who could afford to take vacation were the big winners. Lodging away from home, which includes hotels, fell 2.1 percent after increasing 0.3 percent in June. Discounts for traveler lodging pulled the latest number down.
It was not all good news in the CPI report. Surprisingly, new & used motor vehicles rose 0.3 percent despite government credits in the cash for clunkers program. However, used vehicle prices were flat, reflecting lots of supply, while new vehicles were up 0.5 percent in July. States keep raising tobacco taxes to boost revenues and that was reflected in a 2.2 percent jump in tobacco & smoking products for the month. The tobacco index has now risen 27.8 percent over the past year.
Soft inflation for now is giving the Fed room to keep its balance sheet expansion high. But the bad news is that the weak CPI is indicative of a sluggish economy—especially for the consumer sector.
 We got at least temporary improvement in import prices in July with a drop of 0.7 percent, following a 2.6 percent boost in June. The July dip was primarily due to a 2.8 percent drop in the price of petroleum imports. But excluding petroleum, import prices still declined, slipping 0.2 percent after edging up by the same percentage in June.
 The July decrease in nonpetroleum prices was led by a 0.9 percent fall in nonpetroleum industrial supplies and materials—especially for chemicals and natural gas. Consumer goods prices also decreased, falling 0.4 percent in July. Lower prices for apparel, TVs & video receivers, and jewelry all contributed to the decline.
In contrast, the price indexes for capital goods and automotive vehicles increased in July, rising 0.2 percent and 0.1 percent, respectively.
Despite the jump between February and June, petroleum prices fell 49.9 percent over the past year. Overall import prices posted the largest annual decline since the index was first published in 1982, falling 19.3 percent for the year ended in July. Nonpetroleum prices fell 7.3 percent over the past 12 months, the largest annual decrease since the index was first published in 1985.
 While job losses have been bad news for consumers, the cuts in labor costs have helped create the conditions for higher business profits—at least for now. Second quarter productivity posted a sharp gain of 6.4 percent annualized, following a revised 0.3 percent rise in the first quarter. Unit labor costs fell an annualized 5.8 percent after dropping a revised 2.7 percent in the first quarter.
The jump in productivity and drop in unit labor costs were due to hours worked falling much faster than output. Hours worked plunged an annualized 7.6 percent while output edged down 1.7 percent.
It is typical during recession that productivity rises and unit labor costs dip as companies cut their labor force. And if the mix is right, profits go up—as has been the case for some corporations. For others, losses simply are not as severe. But a big concern is how long can companies boost profits by cost cutting' At some point, cost cutting ends and revenues need to pick up. Currently, consumer-oriented companies appear to be at risk while exporters and maybe homebuilders have a more favorable outlook.
 As expected, after the close of the two-day FOMC meeting, the Fed announced no change in the fed funds target which remained at a range of zero to 0.25 percent. However, the Fed reiterated that the fed funds rate will remain low for an "extended period." The Fed went into some detail about its plans for its balance sheet and they are consistent with earlier announcements about the extent of expansion. The Fed is hinting that unwinding may begin shortly after October but was vague enough to keep options open. Also, the FOMC indirectly suggested that the recession is ending. Instead of noting that the "pace of economic contraction is slowing" as last time, the Fed stated that "economic activity is leveling out." This is an upgrade for the economy. Nonetheless, "economic activity is likely to remain weak for a time."
Inflation hawks should be happy that the Fed is starting to show its hand on when it will start pulling back on balance sheet expansion. The Fed will continue to buy more securities but expansion of the Fed’s balance sheet may end soon as the FOMC announced it will complete its planned purchases of mortgage-backed securities and agency debt by the end of the year. Also, the Fed anticipates that the full amount of planned purchases of longer-term Treasuries will be purchased by the end of October. The Fed is keeping its options open on further quantitative easing but this specific announcement more likely than not indicates that the Fed will soon start unwinding its balance sheet. Nonetheless, the eventual Fed tightening is likely to be very gradual.
The economy likely has hit bottom of recession and may have even begun recovery as early as July—maybe. But whether recovery has already begun or will shortly begin, economic growth is going to be choppy and sluggish initially due to a weak consumer sector.
Market moving indicators are housing on Tuesday and the producer price index on Wednesday. But also getting attention will be existing home sales on Friday.
The Empire State manufacturing index general business conditions index rose to minus 0.55 in July from minus 9.41 in June, just falling short of the breakeven mark. A zero reading would indicate no month-to-month change or flat growth. But we may see incrementally positive growth next month, if new orders follow through. The new orders index jumped into positive territory at 5.89 from minus 8.15 in June.
Empire State Manufacturing Survey Consensus Forecast for August 09: 5.00
Range: -5.00 to 8.00
Housing starts in June increased 3.6 percent, following a huge 17.3 percent spike in May. The latest rise was led by the single-family component which advanced 14.4 percent after rising 5.9 percent the month before. However, the multifamily component gave back some of May’s surge, falling 25.8 percent after a very strong 65.9 percent boost the month before. While it would be nice to see another gain in starts in June, we may just have to be content for the near term if there is no slippage given that unemployment is still high and consumer sentiment has declined. But there is modest reason for hope for gains ahead. Single-family home sales have been rising in recent months with existing up 3.6 percent in June and new up 11.0 percent for the same month. Supply on the markets has been improving but is still high, however.
Housing starts Consensus Forecast for July 09: 0.605 million-unit rate
Range: 0.555 million to 0.630 million-unit rate
The producer price index in June jumped sharply at the headline level due to higher energy costs, spiking 1.8 percent in June, after increasing 0.2 percent in May. The energy component surged 6.6 percent while the food component also posted a large gain of 1.1 percent. Meanwhile the core PPI rate increased 0.5 percent, boosted by a 2.0 percent jump in auto prices and a 3.4 percent surge in light truck prices. July should be quite soft with energy prices likely down and motor vehicle prices possibly back down.
PPI Consensus Forecast for July 09: -0.3 percent
Range: -0.7 to +0.1 percent
PPI ex food & energy Consensus Forecast for July 09: +0.1 percent
Range: 0.0 to +0.2 percent
Initial jobless claims were little changed in the August 8 week at 558,000 compared to 554,000 in the prior week. The numbers, in a plus, are a little bit below the four-week average, which is at 565,000. Continuing claims fell steeply in the August 1 week, down 141,000 to 6.202 million. But the decline is most likely due to the expiration of benefits. Currently, companies are still in cost cutting mode and the level of new claims is likely to remain high in coming weeks.
Jobless Claims Consensus Forecast for 8/15/09: 550,000
Range: 545,000 to 559,000
The Conference Board's index of leading indicators has risen three months in a row with the latest month, June, posting a 0.7 percent gain. The latest spike was led by a boost in the spread between the 10-year T-bond and fed funds rate and a gain in building permits. It is too early to gauge whether the leading index will rise in July—too many key components have yet to be released. But we have interesting hints for the coincident index. Whether or not the recession has ended will likely depend much on the coincident index which was negative through June. But two of the four components are likely to be positive—industrial production and personal income (less government transfers). Of the other two, payroll employment edged down 0.2 percent in July and business sales are likely to be down based on a dip in retail sales. So, there is a modest chance that the coincident index is positive—suggesting an end of the recession.
Leading indicators Consensus Forecast for July 09: +0.7 percent
Range: +0.4 to +0.7 percent
The general business conditions component of the Philadelphia Fed's business outlook survey index fell back in July to minus 7.5 from minus 2.2 in June. Nonetheless, the index was not far from breakeven and was considerably improved from levels in the minus 30s and even minus 40 in late 2008 and early 2009. The good news is that improvement is likely to resume as the new orders index rose to minus 2.2 from minus 4.8 in June.
Philadelphia Fed survey Consensus Forecast for August 09: -1.0
Range: -8.0 to 0.0
Existing home sales have been indicating the beginnings of recovery in housing with three consecutive increasing, the latest being a 3.6 percent rise in June. Sales levels are still weak, however. Nonetheless, we are likely to see another modest increase in July as the pending home sales index for June jumped 3.6 percent for its fifth consecutive increase. Pending home sales indicate the strength in existing home sale one to two months later.
Existing home sales Consensus Forecast for July 09: 5.00 million-unit rate
Range: 4.95 to 5.25 million-unit rate
Econoday Senior Writer Mark Pender contributed to this article.
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