During most of the month, declines or increases in crude oil price futures were responsible for very good or very bad days in the equity markets! Earnings have also played a role in affecting equity prices, as have scandals.

BONDS
Aside from a 20 basis point increase in the 3-month bill, yields are generally down between 5 and 10 basis points across the rest of the yield curve from a month ago. The major negative news for the economy stemmed from surging crude oil prices which rose by more than $5 per barrel over the course of the month - although at month end, prices were only a couple of dollars higher than on September 30th. The uncertainty of the presidential election along with continuing problems in Iraq kept safe-haven interest in the Treasury market.

The presidential election will be over next week (as long as there's no repeat of the Florida debacle), and the Fed is likely to raise its federal funds rate target by 25 basis points on November 10, which would push the target to 2 percent. Perhaps the fourth rate hike since June 30th will be the one that gets bond investors to realize that a rate hike by the Fed is often accompanied by corresponding increases in market rates.

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.

The Economy

Q3 GDP accelerates from Q2 pace
Real GDP expanded at a 3.7 percent rate in the third quarter after growing at a 3.3 percent pace in the second quarter. Personal consumption expenditures accelerated to a 4.6 percent rate in the third quarter, boosted by a robust 16.8 percent rate in durable goods expenditures. Nondurable goods also increased more rapidly than in the third quarter. Since the consumer accounts for more than two-thirds of GDP, a boost in personal spending will certainly help propel business activity in general.

Nonresidential investment spending, which includes structures as well as equipment & software, expanded at a healthy 11.7 percent rate, just slightly less than the 12.5 percent pace recorded in the second quarter. The bulk of the activity was concentrated in equipment & software; structures posted just a meager rise. Residential structures only increased at a 3.1 percent rate after expanding at a whopping 16.5 percent rate in the second quarter. This is not surprising: housing starts have remained strong in the past few months but they are not growing very much, and it is the additional growth that gets added to GDP gains.

Business inventories grew by $48 billion in the third quarter, a hefty amount but $13 billion less than in the second quarter. As a result, inventory accumulation acted as a drag on GDP growth. This means that real final sales grew more rapidly than GDP - at a 4.2 percent rate, up dramatically from the second quarter pace of 2.5 percent. While this isn't always true, one can expect more inventory building if growth in final sales exceeds growth in GDP for at least two quarters. At this stage, we can't predict whether businesses will choose to accelerate inventory accumulation in coming months, although the inventory-to-sales ratio remains at historical lows.

Speaking of drag, the real net export balance widened by $18 billion in the third quarter; this isn't quite as bad as last quarter when it widened by $30 billion. Exports increased at a 5.1 percent rate, slightly less than the 7.3 percent gains posted in both the first and second quarters. But imports also moderated their rate of growth to 7.7 percent from more than 12 percent in the previous quarter. The net export balance will likely undergo a large degree of change in upcoming GDP revisions since the Bureau of Economic Analysis had to estimate September trade flows. But rest assured, international trade will likely remain a major drag on U.S. growth in the foreseeable future.

The GDP deflator increased at a modest 1.3 percent rate in the third quarter after growing at a 3.2 percent rate in the second quarter. The biggest change from last quarter was a moderation in the personal consumption expenditure deflator from 3.1 percent to 1.1 percent as durable goods products actually showed deflation, a 3.1 percent drop in prices. The nondurable goods deflator (where energy prices lie) rose at a meager 0.9 percent rate in the third quarter after increasing at a 6.6 percent rate in the second quarter and a 5.3 percent rate in the first quarter.

The market consensus for third quarter GDP growth was slightly higher than the advance estimate, but the overall picture looks good. Since real final sales accelerated to a 4.2 percent rate from a 2.5 percent rate, it suggests that final demand was healthier in the third quarter. Also, business inventories (like the net export balance) must be estimated for September since actual figures aren't available. The Commerce Department might find that inventory building was a little stronger after all. But even if they don't, the growth rate was solid.

ECI stable in Q3
The employment cost index increased 0.9 percent in the three months ending September, the same rate as in the three previous months. Wages and salaries picked up a tick, rising 0.7 percent for the period after increasing 0.6 percent in the period ending June. It is a small improvement that may benefit workers. At the same time, benefits costs increased 1.1 percent in September from three months ago, significantly less than the June rise of 1.8 percent and the March hike of 2.4 percent. This will no doubt benefit employers since they are laying out less money. Reduced employment costs help businesses control employment expenses and improve profit margins. These figures should be viewed in a positive light by equity markets.

Q3 Durable goods orders rise again
New orders for durable goods edged up a meager 0.2 percent in September after dipping 0.6 percent in August. July orders were stronger, posting a 1.9 percent gain. Consequently, total durable goods orders (excluding semiconductors) managed to rise at nearly a 9 percent rate for the third straight quarter. In both August and September new orders were held down by declines in the transportation sector. Excluding transportation, orders rose 1.7 percent in September and 2.8 percent in August.

In September, primary and fabricated metals along with electrical machinery and transportation posted declines in orders, but machinery and computers posted healthy gains. Indeed, nondefense capital goods orders have increased in two of the past three months. Consequently, new orders surged at a 20.3 percent rate in the third quarter, an acceleration from the three previous quarters. This bodes well for capital spending in upcoming months.

NAPM-Chicago index jumps in October
The NAPM-Chicago business barometer, considered a leading indicator for the ISM manufacturing index, jumped nearly 7 points in October to 68.5 from a level of 61.9 in September. Keep in mind, though, that the Chicago business barometer also includes nonmanufacturing activity. Notice in the chart below, that while these two measures often move in tandem, the Chicago index increases (and decreases) more dramatically in a given month than the ISM index. Many economists have revised up their forecasts for the ISM index based on the Chicago index. Be careful, though, the ISM is likely to increase by a much smaller amount! Nonetheless, the NAPM-Chicago at least points to improved activity (whether it is manufacturing or nonmanufacturing).

An interesting wrinkle has developed with the NAPM-Chicago index lately. Jack Bishop, a private consultant, has compiled the data for the Chicago group since the 1970s. Earlier this year, Jack Bishop left the U.S. to consult in Iraq. He is now back - and demanding more money from subscribers who wish to get the information three minutes before it is released publicly. According to Bishop, both he and the NAPM-Chicago group will benefit from the increased revenues. Another privately-released economic indicator that follows this monetary model is the University of Michigan's consumer sentiment survey. It will be interesting to see how this develops in coming months.

Home sales dip in Q3
New home sales rose 3.5 percent in September to a 1.2 million-unit rate and existing home sales increased 3.1 percent to a 6.75 million-unit rate for the month. Nonetheless, the September gains were not sufficient to boost the quarterly average, which shows that home sales fell 2 percent in the third quarter from a second quarter peak. Levels, though, are still very healthy since the third quarter pace is the second highest in the history of these series.

Mortgage rates, which are tied to Treasury yields, have fallen in the third quarter even though the Fed has raised its fed funds rate target three times during the period. Special factors (a great deal of insecurity in the financial markets) have kept a lid on rates despite the Fed rate hikes. The Fed is expected to increase the target rate by 25 basis points in two weeks, bringing the funds rate level to 2 percent. It remains to be seen whether market rates will start heading higher; one would expect them to, particularly after the uncertainty of the U.S. presidential election is over.

Confidence declines for third straight month
The Conference Board's consumer confidence index decreased almost four points in October to 92.8 from a revised level of 96.7 in September. In July, the index had reached a high of 105.7. But this was before the rapid run up in crude oil prices. The University of Michigan's consumer sentiment index decreased to 91.7 in October from September's level of 94.2. It should be no wonder consumers are becoming less optimistic about economic conditions - they are paying higher prices for gasoline and they are not having an easier time finding jobs. Moreover, consumers are bombarded with silly political rhetoric from all sides ahead of next Tuesday's presidential (and congressional) election.

The Bottom Line
Economic news was not always in line with expectations this week, but on the whole, third quarter results were not altogether bad. GDP growth accelerated a bit from the second quarter; inflation moderated significantly from the previous quarter.

Just a few more days, this year's election will be completed. We certainly hope that Wednesday morning will bring final results rather than a replay of four years ago. Uncertainty is not good for anyone, but financial markets in particular will benefit from a "done deal".

Looking Ahead: Week of Nov 1 to Nov 5

Monday
Personal income inched up 0.4 percent in August, stronger than the two previous months. The September gain could be muted since nonfarm payrolls increased only modestly, the average workweek was unchanged and hourly earnings rose only 0.2 percent. Personal consumption expenditures were unchanged in August but could increase sharply in September based on the healthy rise in September retail sales.

Personal income Consensus Forecast for Sept 04: 0.3 percent
Range: 0.0 to 0.4 percent

Personal consumption expenditures Consensus Forecast for Sept 04: 0.6 percent
Range: 0.3 to 0.8 percent

The ISM manufacturing index fell back slightly in September to 58.5 from 59 in August. Levels are down from their highs but still represent solid manufacturing activity in the nation.

ISM manufacturing index Consensus Forecast for Oct 04: 58
Range: 56 to 61

Construction spending rose 0.8 percent in August after an upward revised 1.1 percent hike in July. But overall construction is benefiting from residential construction where growth is moderating, not accelerating.

Construction spending Consensus Forecast for Sept 04: 0.5 percent
Range: 0.0 to 0.6 percent

Tuesday
Returns won't be available until the middle of the night, but the presidential election will be on everyone's mind. Traders are hoping for election results that won't involve hanging chads.

Wednesday
The ISM non-manufacturing index decreased in September to 56.7 from 58.2 in August. Levels are down from their highs but still represent solid business activity.

ISM non-manufacturing index Consensus Forecast for Oct 04: 57.5
Range: 54.3 to 61

Factory orders edged down 0.1 percent in August due entirely to a sharp drop in nondefense capital goods orders. But nondurable goods orders increased. September orders are likely to rebound.

Factory orders Consensus Forecast for Sept 04: 0.4 percent
Range: 0.2 to 0.8 percent

Domestically produced motor vehicle sales jumped 5.4 percent in September to a 17.5 million-unit rate. But incentives were less prevalent in October and consumers may have been less inclined to purchase autos or SUVs.

Light trucks Consensus Forecast for Oct 04: 8.5 million-unit rate
Range: 7.7 to 8.6 million-unit rate

Domestic autos Consensus Forecast for Oct 04: 5.3 million-unit rate
Range: 4.9 to 5.4 million-unit rate

Thursday
New jobless claims rose 20,000 in the week ended October 23 to 350,000 after declining 25,000 in the previous week. The 4-week moving average fell back to 343,250. The week did follow a week with a holiday and although the figures are adjusted for seasonal variation, holiday-shortened weeks are usually followed by weeks with increases in claims.

Jobless Claims Consensus Forecast for 10/30/04: 340,000 (-10,000)
Range: 335,000 to 350,000

Nonfarm business productivity increased at a 2.5 percent rate in the second quarter, slower than the first quarter pace of 3.7 percent. Both economic growth and employment conditions help determine productivity gains during any given quarter.

Nonfarm business productivity Consensus Forecast for Q3 04: 1.7 percent annual rate
Range: 0 to 3.5 percent annual rate

Unit labor costs Consensus Forecast for Q3 04: 2.0 percent annual rate
Range: 1 to 2.8 percent annual rate

Friday
Nonfarm payroll employment increased by a modest 96,000 in September. October figures will be important, not so much in determining whether the Fed will raise rates again but rather what they will say in their post-FOMC statement. Politically, these numbers will be less important since the 2004 election will be over.

Nonfarm payrolls Consensus Forecast for Oct 04: 160,000
Range: 85,000 to 225,000

Unemployment rate Consensus Forecast for Oct 04: 5.4 percent
Range: 5.3 to 5.5 percent

Average hourly earnings Consensus Forecast for Oct 04: 0.3 percent
Range: 0.2 to 0.3 percent

Average workweek Consensus Forecast for Oct 04: 33.8 hours
Range: 33.7 to 33.9 hours

Consumer credit fell by $2.4 billion in August due primarily to a decline in revolving credit. Though consumer spending wasn't strong in August, September retail sales surged - and this could help boost credit usage.