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Equities posted moderate gains this past week—but it wasn’t due to good economic news. The economy continued to worsen in late first quarter. However, favorable earnings reports trumped gloomy economic data.
 Most major equity indexes rose for the sixth consecutive week despite generally negative economic news. Earnings more often than not beat estimates and by mid-week, earnings are what mattered. The week started off with a day-early release from Goldman Sachs, showing first quarter earnings topping forecasts. But some analysts downplayed the results as being unsustainable. Economic news actually did make a difference on Tuesday as an unexpectedly strong drop in retail sales weighed on stocks – hurting retailers such as Best Buy and Macy’s.
But stocks headed back up on Wednesday and never looked back the rest of the week. Getting markets off to a good start – especially techs – was a Tuesday after-close announcement by Intel where sales and earnings beat expectations. Later in the day, investors welcomed the Fed’s Beige Book as indicating that the current economic decline may be slowing – that is, falling but not as fast as earlier. Financial stocks rallied on news from American Express that charge-offs for managed consumer accounts rose at a slower pace in March. Financials continued to make gains on Thursday on better-than-expected results from JPMorgan Chase. And traders jumped in early in the tech sector, betting that Google would beat estimates. Equities essentially ignored the sharp drop in housing starts reported Thursday morning and focused on the belief that jobless claims were slowing and that manufacturing was less negative based on improvement in the Philly Fed manufacturing index. The Philly Fed index, similar to the Beige Book, was less negative in April.
Earnings took center stage early on Friday as better-than-expected earnings from Citigroup and General Electric boosted equities during most of the day before profit taking trimmed gains before close. Net for the week, investors still believe the worst of the recession is over despite serious questions raised by this past week’s economic data. On belief that the worst is over, equities have posted six consecutive weeks of net gains.
Equities were up this past week. The Dow was up 0.6 percent; the S&P 500, up 1.5 percent; the Nasdaq, up 1.2 percent; and the Russell 2000, up 2.4 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 7.3 percent; the S&P 500, down 3.7 percent; and the Russell 2000, down 4.0 percent. The Nasdaq is up 6.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields this past week were mixed and little changed. There was modest movement during the week, rates eased somewhat on Monday and Tuesday on flight to safety as stocks fell and on the huge drop in retail sales. Rates firmed slightly the last two days of the week as better-than-expected company earnings led funds out of bonds and into equities.
For this past week, Treasury rates were mixed as follows: 3-month T-bill, down 5 basis points, the 2-year note, up 1 basis point; the 5-year note, unchanged; the 10-year bond, up 3 basis points; and the 30-year bond, up 5 basis points.
 Oil markets paid more attention to economic news than did equities, with prices softening on poor economic data. But daily movements were very modest except on Monday as the International Energy Agency cut its forecast for oil demand for 2009. Demand is expected to be at its lowest level in five years, reflecting a projected 2.8 percent drop for the year as factories cut production and consumers reduce spending. Weak retail sales damped oil prices somewhat on Tuesday while an unexpected surge in crude supplies eased prices on Wednesday.
Net for the week, spot prices for West Texas Intermediate dropped $1.91 per barrel to settle at $50.33.
The economic news this past week was mostly unexpectedly negative. While it is possible that that consumer spending, housing starts, and industrial production may soon be falling less rapidly, it is clear that current levels of activity are lower than expected.
 If consumers are supposed to help stabilize the economy, they certainly didn’t get that memo in March. March retail sales were surprisingly negative, calling into question the green shoots theory that recovery is underway. Overall retail sales dropped 1.1 percent in March after a 0.3 percent gain in February. Excluding motor vehicles, retail sales decreased 0.9 percent, after a 1.0 percent boost the month before. Discounting motor vehicles and gasoline, retail sales fell 0.8 percent after gaining 0.7 percent in February.
 Sales were weak across the board. But the strongest declines were seen in electronics & appliance stores, down 5.9; motor vehicles, down 2.3 percent; and miscellaneous store retailers, down 2.2 percent.
Overall retail sales on a year-on-year basis in March were down 9.4 percent, compared to down 7.9 percent in February.
The March retail sales report shows the consumer sector back into retreat mode. Most likely some of the weakness was price related as stores engaged in discounting to bring in customers. But the news still is not good. The only positive is that a late Easter may have shifted some sales from March to April – but this does not explain the broad-based weakness in sales.
 The one somewhat positive economic news – and it’s all relative – was for the mid-April reading of consumer sentiment. The Reuters/University of Michigan's consumer sentiment index rose to 61.9 from 57.3 final reading for March. Most of the improvement was in the expectations index which moved up to 58.9 from 53.5 in March, indicating that consumers may see that the very worst of the recession has passed. Current conditions also picked up, rising to 66.6 in mid-April from 63.3 in March. Again, it’s all relative – sentiment improved but it’s still not much above rock bottom. Until sentiment rises much more sharply, consumers are likely to still be in retrenchment mode.
 The goods-producing sector remains quite weak and now it is manufacturing that is worsening as housing, another goods-producing sector, has hopefully hit bottom. Overall industrial production in March fell 1.5 percent, matching the decline the previous month. But the manufacturing component was even more negative, falling 1.7 percent, following a 0.6 percent decrease the month before. Declines were broad-based with the exception of motor vehicles, which advanced slightly.
For the other major nonmanufacturing components, utilities in March rebounded 1.8 percent while mining output plunged 3.2 percent. The drop in mining was due to declines in oil and gas as well drilling.
 The freefall in industrial production has led to both closing of plants and running assembly lines at a much slower pace. Overall capacity utilization in March continued its downtrend, dropping to 69.3 percent from 70.3 percent in February. The March number set an historical low for the capacity measure which goes back to 1967.
By just about all measures, manufacturing is in severe contraction. On a year-on-year basis, industrial production in March slipped further to down 12.8 percent from down 11.8 percent the prior month. The March year-ago decline was the weakest since a 16.0 percent drop for July 1946.
Yes, manufacturing is still declining in the Philly and New York Fed regions. But the good news is that the declines are not as severe in April as in the prior two months. The Philadelphia Fed's general business conditions index for April improved more than 10 points to minus 24.4. The new orders index posted an even sharper gain, rising more than 15 points to minus 24.3. Unfilled orders also improved slightly.
The Empire State manufacturing report showed huge improvement in April. The general business conditions index jumped nearly 25 points to a still contractionary minus 14.7. Like the Philly report, Empire’s new orders improved sharply, moving from March's very negative minus 44.8 to almost breakeven at minus 3.9 in April.
While first quarter industrial production was deeply negative, the latest manufacturing surveys suggest that the steepness of decline is easing heading into the second quarter. The expectations indexes in both surveys improved notably. For the Philly Fed the general business expectations index rose to 36.2 from 14.5 in March while Empire’s jumped to 33.1 from 3.1 the prior month.
 Irregular winter weather has wreaked havoc on interpreting recent housing starts numbers. In March, housing starts reversed course, posting a sharp decline. Starts fell back 10.8 percent in March, following a 17.2 percent rebound the month before. But going back to January, atypically wet and cold weather in the South depressed starts, leading to the sharp rebound in February – which also was abetted not just by a return to normal winter but by milder-than-usual weather. Now, March figures likely reflect a return to normal, seasonal weather with homebuilders still hamstrung by excess inventory.
The March pace of 0.510 million units annualized was down 48.4 percent year-on-year. The reversal in starts was led by the multifamily component which plunged 29.0 percent while single-family starts were unchanged.
 Permits also resumed a downtrend, declining 9.0 percent in March, after a rebound of 6.2 percent in February. The March permit pace of 0.513 million units annualized was down 45.0 percent on a year-ago basis. Also, the March permit level is a record low for this series going back to 1960.
The latest housing starts report shows that this sector remains under pressure from excess supply of unsold homes.
The latest Beige Book – released this past Wednesday for the upcoming April 28-29 FOMC meeting - indicates that there are signs that the pace of decline in economic activity is moderating. That is, the economy is still contracting but not as fast as in the previous Beige Book. Even though the Beige Book indicates that the economy is still in deep recession, markets focused on the fact that several Districts reported a slowing in the rate of contraction. The Beige Book stated that "five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level."
The Beige Book reported that manufacturing continued to decline but that there are signs that manufacturing is starting to bottom. Consumer spending remained generally weak. However, several Districts said retail sales rose slightly or declines moderated compared with the previous survey period. Auto sales, however, were anemic.
The all-important housing sector was found to be giving mixed signals. House prices are still falling but buyer traffic was better than expected in a number of Fed Districts. Nonresidential real estate conditions continued to deteriorate.
Again, the bottom line is that the U.S. economy is still contracting but likely not as fast as in January. However, signs are that we'll be bouncing along bottom for a while.
 The latest inflation numbers certainly give the Fed more room to continue its plan to inject massive amounts of liquidity into credit markets. The headline CPI declined 0.1 percent in March, following a 0.4 percent gain the month before. Meanwhile, core CPI inflation remained steady at 0.2 percent, equaling the market expectation.
The deceleration in the headline CPI was led by a 3.0 percent dip in energy costs, following a 3.3 percent jump the month before. Gasoline fell 4.0 percent in the latest month.
 A number of factors kept the core CPI moderate. The indexes for lodging away from home, used cars and trucks, and airline fares continued to decline. Apparel prices fell in the latest month after no change in February. Recreation costs were flat in the latest month. Importantly, the core rate would have been significantly weaker had there not been a monthly 11.0 percent surge in prices for tobacco & smoking products due to higher taxes.
Year-on-year, headline inflation fell to down 0.4 percent (seasonally adjusted) in March from up 0.1 percent in February. Meanwhile, the core rate was steady at up 1.8 percent.
 Lower energy costs pulled the headline PPI down a sizeable 1.2 percent in March after firming 0.1 percent in February. Meanwhile, the core PPI rate eased to no change after a 0.2 percent boost in February. Pushing the headline number down was a 5.5 percent drop in energy costs along with a 0.7 percent fall in food costs.
Softening up the core rate were light trucks and passenger cars, which declined 0.4 percent and 0.2 percent, respectively.
For the overall PPI, the year-on-year rate fell to minus 3.6 percent in March from down 1.6 percent the month before (seasonally adjusted). The core rate slipped to up 3.8 percent from up 3.9 percent in January.
Although financial markets are focusing on the so-called “green shoots” in the believed-to-be early spring of recovery, the latest economic news simply does not support that view. If anything, any green shoots just got a dusting of early spring frost. The combination of sharp declines in retail sales, industrial production, and housing starts indicates that first quarter GDP will be quite negative. The good news, however, may be that the first quarter will have been the worst of the recession. The real question is how long does the economy continue to slip or even remain flat' Thus far, the evidence is that it will be flat at best for many months.
This coming week, there is only one market moving indicator out—durable goods orders on Friday. But the housing sector has been getting elevated attention due to that sector’s depressed condition. Markets will be paying attention to existing home sales on Thursday and new home sales on Friday.
The Conference Board's index of leading indicators sank 0.4 percent in February after a 0.1 percent gain in January. The biggest negatives in February were jobless claims, which continue to erode, and stock prices, which may now be recovering. The coincident index fell 0.4 percent in February, following a 0.6 percent decline the prior month. Looking ahead, consumer expectations improved slightly in March and money supply rose. However, building permits fell, the manufacturing workweek slipped, supplier deliveries showed faster deliveries (more slack), and there was a narrowing of the spread between the 10-year T-note and fed funds due to the Fed’s buying long Treasuries. Net, we are likely to get a moderate decline for March.
Leading indicators Consensus Forecast for March 09: -0.3 percent
Range: -0.5 to +0.1 percent
Initial jobless claims for the latest week fell to a much lower-than-expected level of 610,000, down 53,000 from the 663,000 in the prior week. But the latest data are for the holiday shortened Easter/Passover week of April 11. The Labor Department warned that the results were heavily affected by adjustments. The four-week average came in at 651,000. But the really negative news was that continuing claims for the April 4 week jumped again to another historical record, up 172,000 to above 6 million at 6.02 million. This coming week, we may see a jump in initial claims, coming off the holiday week before.
Jobless Claims Consensus Forecast for 4/18/09: 636,000
Range: 615,000 to 650,000
Existing home sales in February jumped 5.1 percent to an annualized pace of 4.720 million units. Bargain prices on foreclosed homes and extremely low mortgage rates are finally having some positive impact. Levels are still low with the year-ago decline at minus 4.6 percent. And supply is still high at 9.7 months. However, prices did firm – although from low levels, rising 0.4 percent in the month. The median price of $165,400 was still down 14.8 percent on a year-ago basis.
Existing home sales Consensus Forecast for March 09: 4.70 million-unit rate
Range: 4.50 to 4.90 million-unit rate
Durable goods orders rebounded a revised 3.5 percent in February after falling 7.8 percent in January. The rise in durables showed wide gains across components though against easy comparisons with very weak January data. Looking ahead, we are likely to see slippage for March. The new orders indexes in the latest manufacturing surveys for ISM, Philly Fed, and New York Fed improved but remained in negative territory.
New orders for durable goods Consensus Forecast for March 09: -1.8 percent
Range: -4.9 percent to +1.0 percent
New home sales unexpectedly jumped a monthly 4.7 percent in February. The 337,000 million unit annual pace was down 41.1 percent compared to a year ago. Supply on the market fell to 12.2 months from 12.9 months in January, remaining quite swollen. Although the labor market picture is not good for housing, there are signs that sales may have hit bottom. Buyer traffic has picked up and mortgage rates are extremely low. Also, homebuilders appear to be caving in on prices, offering big discounts.
New home sales Consensus Forecast for March 09: 330 thousand-unit annual rate
Range: 310 thousand to 355 thousand-unit annual rate
Econoday Senior Writer Mark Pender contributed to this article.
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