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Based on nearly all of the economic data this past week, the recession is worsening in the first quarter. Nonetheless, equity markets were looking quite a bit into the future, seeing economic recovery ahead and posting notable gains for the week. But, indeed, the economic news was dreadful and it may be a little early to be celebrating pending recovery.
 It was an awful week for the economy but you could not tell it by how stocks fared. Even though payroll employment plummeted by over half a million for three consecutive months, the unemployment rate spiked, and personal income dropped, major indexes rose from over 3 percent to almost 8 percent for the week.
But the week started off on the wrong side of the bed for Blue Chips as the Dow and S&P500 were led downward by bank stocks even though techs and small caps posted gains. After a negative personal income report on Monday, equities were a little soft. But markets turned optimistic on the pending plan for an update on the credit market rescue from the Treasury and a fiscal stimulus plan being enacted. A couple of key earnings reports from Walt Disney and Kraft Foods missed expectations on Wednesday and resulted in a downward blip at mid-week. But better-than-expected earnings from Wal-Mart got stock back on the uptrend on Thursday. Friday found the markets ignored an abysmal jobs report and focusing on plans to repair the credit markets and to juice the economy with fiscal stimulus. Bank stocks were boosted by optimism about the coming speech on Monday from Treasury Secretary Geithner on the Administration’s financial rescue plan. Also lifting bank stocks was news that Bank of America CEO Ken Lewis bet a million dollars of his own money on struggling Bank of America.
The bottom line is that equities looked completely past this past week’s dismal economic news and focused on hopes the further fixes for the credit markets and fiscal stimulus will work. The equity markets are very likely right that the credit markets will be stabilized and the fiscal stimulus will boost the economy. But they may be a little too optimistic about the timing and may be underestimating the depth of the problems to be corrected.
Equities were up this past week. The Dow was up 3.5 percent; the S&P 500, up 5.2 percent; the Nasdaq, up 7.8 percent; and the Russell 2000, up 6.1 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 5.6 percent; the S&P 500, down 3.8 percent; the Nasdaq, up 0.9 percent; and the Russell 2000, down 5.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields firmed slightly this past week despite abysmal news from economic reports—including very negative employment and personal income reports. On Monday, note and bond rates slipped on the personal income report but rose moderately the next day on outflow into equities as stocks posted notable gains for the day. Equities kept their unfathomable cheery disposition for the week, weighing on bond prices. Also, the credit markets are really just beginning to soak in the amount of supply that the Treasury will be dumping in coming years and even this coming week. Finally, the bond market also concluded that fiscal stimulus increasingly appears to have some notable impact on the economy once underway. This also supported a firming in rates.
 The big picture is that near-term rates are still being held hostage by the Fed’s quantitative easing, keeping short-term rates close to zero. Longer-term rates are being boosted more by increased supply than by stronger economic growth – although the latter is having some impact on rates.
For this past week Treasury rates were up as follows: 3-month T-bill, up 4 basis points, the 2-year note, up 9 basis points; the 5-year note, up 9 basis points; the 10-year bond, up 12 basis points; and the 30-year bond, up 8 basis points.
 Crude oil prices showed little net change for the week. During the first half of the week, traders actually were concerned about the impact of a worsening recession on oil demand. Prices were bumped up the last two days of the week on somewhat increased belief that OPEC will cut production. Also, the increased likelihood of passage of a fiscal stimulus package and its impact on spurring economic growth helped lift crude late in the week.
Net for the week, spot prices for West Texas Intermediate edged up 17 cents per barrel to settle at $41.85 – and coming in $103.44 below the record settle of $145.29 per barrel set on July 3.
This past week’s economic news was almost all negative—with the jobs report showing the recession sharply worsening over the last three months. The only good news was soft inflation numbers.
 The labor market now is probably in worse shape than any sector except housing. The January employment report showed the economy worsening further with a third consecutive drop in payroll employment topping half a million. Nonfarm payroll employment in January plummeted 598,000, following a fall of 577,000 in December and a decline of 597,000 in November. Payroll jobs have contracted for 13 consecutive months.
 Employment cuts in December were felt across the board. The latest decline was led by the goods-producing sector which shed 319,000 jobs. Manufacturing and construction declined by 207,000 and 111,000, respectively. Natural resources & mining decreased 1,000.
The service-providing sector also fell sharply – by 279,000 with the largest job losses seen in professional & business services, down 121,000, and in trade & transportation, down 118,000.
On a year-on-year basis, nonfarm payroll employment growth fell to down 1.9 percent in December from down 1.5 percent the month before.
 Employers have basically squeezed out all excess labor costs that they can by reducing hours. Average weekly hours were unchanged at a record low 33.3 hours in January. The current average workweek is an historical low for a series going back to January 1964.
The latest wage inflation numbers have been a little peculiar in recent months. Average hourly earnings have actually been on the high side despite the massive layoffs and numerous companies announcing pay freezes. Average hourly earnings increased 0.3 percent in January after rising 0.4 percent in December. In fact, the year-ago pace is at 3.9 percent – down marginally from 4.0 percent in December. It is likely that average hourly earnings are being kept on the high side by a shift in the composition of those still with jobs with more low-paying jobs being cut than high-paying jobs.
 As expected, the job layoffs boosted unemployment sharply in January. The civilian unemployment rate jumped to 7.6 percent from 7.2 percent in December. The January number is the highest since 7.6 percent for October 1992.
The January employment report indicates that businesses are engaging in wholesale job cuts. This is likely to lead to further cutbacks by consumers which portend further economic contraction ahead. The January employment report is certainly going to be used as ammunition by the Obama Administration to push for passage of a stimulus plan.
 The continued decline in employment is feeding into a chain of causation that is continued to push the economy downward. The job cuts equate to income losses and then declines in spending. Corroborating this, personal income in December dipped 0.2 percent, following a 0.4 percent fall in November. Within personal income, the wages and salaries component posted a 0.3 percent decline after a 0.2 percent fall in November.
 Consumer spending continued to retreat in December, plunging 1.0 percent after a 0.8 percent drop the prior month. Personal consumption has declined for six months in a row.
The limited goods news this past week was on inflation – but this was due not just to lower oil prices but an anemic economy. The headline PCE price index declined 0.5 percent in December, following a 1.1 percent drop the prior month. Indicating how weak the economy is, the core PCE price index was unchanged for the third month in a row.
 The Fed is no longer worried about current inflation. On a year-ago basis, easing on falling oil prices, headline PCE inflation slowed to up 0.6 percent from up 1.4 percent the previous month. Core PCE inflation slipped to 1.7 percent from 1.9 percent in November. The core inflation number clearly is within the Fed’s implicit 1.5 to 2 percent inflation target but the headline number is actually well below the Fed’s comfort zone. The core year-ago pace is at its lowest since the 1.7 percent pace seen in January 2004.
 It’s not just housing any more. Construction spending in December continued to plummet across all major sectors. Construction outlays fell 1.4 percent in December, after posting a 1.2 percent drop in November. Weakness in December was led by a sharp 3.2 percent plunge in private residential outlays. The other two major components also fell with private nonresidential decreasing 0.4 percent while public outlays declined 0.8 percent.
On a year-on-year basis, overall construction outlays were down 3.6 percent in December, compared to down 4.2 percent in November.
It is now clear that several factors are depressing overall construction. Consumer worries over jobs and tight mortgage credit are keeping housing down. Businesses are cutting back on new projects and state & local government budget shortfalls are weighing on public construction. It looks like the numbers are going to be negative for a while.
 Manufacturing is still contracting but a less rapid pace in January, according to the ISM manufacturing report. The ISM's manufacturing index rose more than 2-1/2 points to 35.6, reflecting improvement in new orders which rose to 33.2 from a 23.1 that is sharply below the 50 break-even point. Likewise, backlog orders likewise improved 29.5 from an anemic 23.0 in December.
The decline in prices paid continued but not quite at the precipitous pace in December. The prices paid index rose to 29.0 from 18.0 in December. The latest number is still dramatically below break-even—indicated that far more manufacturers are reporting lower prices than those reporting higher.
The bottom line for manufacturing is that it is still quite weak and declining significantly but not as fast as in December. However, the January jobs report suggest that may not be the case as manufacturing job losses accelerated to 207 thousand in January from down 162 thousand in December.
 Like its manufacturing cousin, the ISM's non-manufacturing report showed the January economy outside of manufacturing declining at a less rapid pace than in December. The non-manufacturing composite index rose nearly 3 points to a 42.9 level that nevertheless still indicates contraction, but again at a slower rate than the prior month. A positive in the report likely was bump up in the new orders index by more than 2-1/2 points to 41.6 But companies are still trying to bring unwanted inventories in line as the inventories index fell 7-1/2 points to 41.5 – meaning that the businesses on average went from rising inventories in December to lower inventories in January (the index crossed over the break-even point of 50). Price contraction eased with the prices paid index rising more than 6 points to 42.5.
The bottom line – as indicated by the personal income and employment situation reports is that consumers are now pulling the economy down along with housing. This is likely to continue until employment stabilizes. Meanwhile, inflation is down and the Fed can afford to keep pumping the money supply for now. Fiscal stimulus is needed and passage appears to be imminent. But whether it is the right mix remains to be seen. Fixing the housing market should be a top priority.
This coming week is relatively quiet for economic indicators. We only have two market movers – international trade on Wednesday and retail sales on Thursday. But both will be important. Will exports continue to fall back and will the consumer continue in near full retreat'
The U.S. international trade gap in November shrank sharply to $40.4 billion from a $56.7 billion shortfall in October. The U.S. trade deficit in November was the narrowest since $40.0 billion for November 2003. But the latest report included goods news and bad news. The good news was that lower oil prices cut sharply into imports. The bad news was that exports also fell – due to slower growth and recession overseas. In November, exports posted a 5.8 percent drop while imports plunged a monthly 12.0 percent. Both the oil and nonoil deficits shrank in November. Looking ahead, lower oil prices will likely shrink the headline deficit number for December. But we also are likely to see weak exports – meaning further damage to the U.S. manufacturing sector.
International trade balance Consensus Forecast for December 08: -$36.0 billion
Range: -$45.0 billion to -$31.0 billion
The U.S. Treasury monthly budget report showed an $83.6 billion deficit in December and a massive deficit of $485 billion just three months into the Treasury's fiscal year. Much of the jump in outlays was tied to the TARP bailout which totaled $55 billion in December vs. $76.5 billion in November. But the Treasury was also buying agency debt, outlays that totaled a separate $21.8 billion vs. November's $23.2 billion. Looking ahead, the month of December typically shows a moderate surplus for the month and this should help trim the bleeding in December. Over the past 10 years, the average surplus for the month of December has been $13.8 billion. But history means very little these days for the budget and another massive deficit is expected for the month.
Treasury Statement Consensus Forecast for January 09: -$79.5 billion
Range: -$126.0 billion to -$72.4 billion.
Retail sales sank again in December, putting to rest any doubt that consumers are retrenching over job losses and fears of unemployment. Overall retail sales fell 2.7 percent in December, after a 2.1 percent decline the month before. Even though the plummet was widespread, it was led by a drop in gasoline sales. Excluding motor vehicles, retail sales decreased 3.1 percent, after retreating 2.5 percent in November. But excluding motor vehicles and gasoline, retail sales, declined a less scary 1.5 percent after a 0.2 percent dip in November. Overall, nearly every major category fell in December. Looking ahead, department stores and auto dealers have been engaging in discounting to move inventories after lackluster holiday sales. We may get a boost from sales but the price cutting could also hurt the final numbers.
Retail sales Consensus Forecast for January 09: -0.8 percent
Range: -2.2 to +0.3 percent
Retail sales excluding motor vehicles Consensus Forecast for January 09: -0.5 percent
Range: -2.3 to +0.6 percent
Initial jobless claims jumped 35,000 in the January 31 week to 626,000 with the prior week revised 3,000 higher to 591,000. The four-week average rose nearly 40,000 to 582,250. These readings were the highest since the early 1980s. Even so, continuing claims indicate that jobs market is in even worse shape. Continuing claims were the highest on record, up 20,000 in the January 24 week to 4.788 million.
Jobless Claims Consensus Forecast for 2/7/08: 610,000
Range: 510,000 to 650,000
Business inventories fell 0.7 percent in November but this was a shadow of the 5.1 percent plunge in sales. October was the same story with inventories down 0.6 percent but with sales down 3.9 percent. Businesses clearly have been trying to get inventories in line but spending has been abysmal. We may actually see a rise in inventories in December because sales were so anemic as reflected in the 2.7 percent drop in retail sales for the month.
Business inventories Consensus Forecast for December 08: -0.8 percent
Range: -2.0 to 0.0 percent
The Reuter's/University of Michigan's Consumer sentiment index was little changed in January at severely depressed levels, at 61.2 and compared to a December reading of 60.1. Both the assessment of expectations and the assessment of current conditions, the two components of the headline index, were little changed. The bottom line is that consumers are extremely worried about current and near-term economic conditions – notably the job market. We need to see an improvement in consumer sentiment so consumers would be more willing to spend and boost the economy.
Consumer sentiment Consensus Forecast for preliminary February 09: 61.0
Range: 56.5 to 64.0
Econoday Senior Writer Mark Pender contributed to this article.
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