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Too often the markets get caught up in where are we now and not enough in where are we headed. This past week was a stark reminder that the rules of recovery have changed from the past. The first consumer sentiment number for July strongly suggests that investors should not be counting on the consumer being the engine of economic growth for some time. Meanwhile, exports had a few rays of optimism.
 Last week, stocks were battered by a gloomy mood on Wall Street. You would have thought that the economic news was all negative. Instead, it was quite mixed, but the news on the consumer sector was almost all on the downside. On the positive side, the ISM non-manufacturing index rose notably while the monthly trade balance shrank significantly, based heavily on a rebound in exports. Also, initial jobless claims declined sharply. But, markets were far more sensitive to signs of retrenchment in the consumer sector. This was due in part to the fact that the employment situation report is still casting a dark shadow over the markets. And in the latest week, chain store sales generally contracted more than expected. And at the close of the week, consumer sentiment fell sharply.
Yes, it was the start of earnings season, too. After close on Wednesday, Alcoa started the Blue Chips off by posting a second quarter loss but beat expectations. Nonetheless, stocks were hurt more often than not by analysts’ revisions to forecasts for upcoming earnings.
Overall, equities were hurt by investor gloom over the economy. But anything could happen this coming week as earnings reports come in. Plus it’s a heavy-duty week for economic news with reports on retail sales, housing starts, industrial production, the PPI, and the CPI.
Equities were down this past week. The Dow was down 1.6 percent; the S&P 500, down 1.9 percent; the Nasdaq, down 2.3 percent; and the Russell 2000, down 3.3 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 7.2 percent; the S&P 500, down 2.7 percent; the Nasdaq, up 11.4 percent; and the Russell 2000, down 3.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 By just perusing the past week’s declines in Treasury yields, you never would have guessed that the Treasury held three huge auctions of longer-term debt during the week. The green shoots theory on pending recovery was heavily discarded despite economic news being mixed. Importantly, the unexpectedly weak jobs report the prior Friday still weighed on the markets, helping to ease yields despite a notable gain in the ISM non-manufacturing index. Except on Thursday, flight to quality from equities to fixed income also helped to lower interest rates. However, on Thursday, a drop in initial claims provided some lift to stocks, cutting into bond prices. For the week, the final hammer to yields was the unexpected drop in consumer sentiment. Basically, fears of a still sluggish economy outweighed worries over looming supply. Also, coming into play to lower rates was the Fed’s purchases of longer-term Treasuries as part of its quantitative easing strategy.
For this past week Treasury rates were mostly down as follows: 3-month T-bill, up 2 basis points; the 2-year note, down 9 basis points; the 5-year note, down 22 basis points; the 7-year note, down 25 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 13 basis points.
 Crude oil prices plunged this past week as markets increasingly decided that green shoots were not taking root as much as earlier believed. The price of West Texas Intermediate plumetted 11.6 percent on the view U.S. economic growth is going to be more sluggish that believed just weeks ago. Throughout the week, a stronger dollar also tugged on oil prices. The biggest daily drop came on Wednesday as WTI fell $2.86 for the day after a government report showed a spike in fuel inventories. Crude has fallen four weeks in a row and posted its largest weekly decline since January.
Net for the week, spot prices for West Texas Intermediate dropped $7.77 per barrel to settle at $59.22. This is sharply below a recent high of $72.68 on June 11, 2009.
This past week was a mixed week for the economy. By count, there were more positives than negatives. But the all-important consumer sector was the negative which outweighed the other indicators. Nonetheless, the trade picture is improving.
 The consumer has grown more worried about the health of the economy and you can see it in further reversals in consumer sentiment in July. The Reuters/University of Michigan consumer sentiment index fell more than 6 points to 64.6 for mid-month July. In recent months, sentiment had been rising on expectations that the economy would be improving in coming months. But that is not so much the case now. The expectations component index fell more than 8 points in July to 60.9. The current conditions index also fell, declining nearly 3 points to 70.4. Basically, consumers are saying that they are not ready to pull out their wallets and go on a spending spree. Consumers are keeping their powder dry for better times and also to work on debt problems.
 Has the consumer mindset changed' There are increased signs that consumers have grown more thrifty and may have changed their ways about relying on debt to consume. Not only are consumers keeping their credit cards tucked away—they even are paying debt down! Consumer credit contracted $3.2 billion in May after a huge drop of $16.5 billion the month before. May's contraction was centered in revolving credit, at $2.9 billion on top of April's $8.7 billion contraction.
What’s behind the downtrend in consumer credit that began back in July 2008' Several things as consumers are saving, not spending, and banks have cut available credit on credit cards for many customers.
 When the overall economy eventually picks up, where’s the consumer going to fit in' We’ve heard that unemployment will lag the rest of the economy. And that it likely will be a jobless recovery for some time after production rebounds. Those likely scenarios point to an economy that cannot rely too much on the consumer.
 But there are other medium-term and long-term issues weighing on consumers’ willingness to spend. Households have taken on far too much debt over that past 15 or so years. The debt burden of households, excluding mortgage debt, is now running about 25 percent of disposable income. Consumers have a long way to go to bring the debt burden back to more reasonable levels seen in the early 1990s.
Higher debt levels and unemployment rates have boosted delinquency rates. Delinquency rates are running far higher than seen during the recessions in 1990-91 and in 2001. Delinquincy rates on residential real estate have been pushed up the most—almost certainly due to a high percent of home-owners being under water on their loans due to the fall in home prices. High delinquency rates suggest that banks and credit card companies are not going to be very generous with credit lines until the economy improves and delinquency rates come down.
 Baby boomers are in retirement or are staring it in the face. Traditionally, there was the belief that retirement would be padded in part by huge gains in house values. The bursting of the recent housing bubble has disabused that notion. Now consumers cannot rely on home values to boost spending through Home Equity Lines of Credit (HELOC) accounts or to help fund retirement as much as previously expected.
 Additionally, the recent credit crisis and recession have wreaked havoc on equity values. Equities have a long way to go to recover value that was lost in 2008. This means that many baby boomers will be boosting their saving rate rather than going on spending sprees.
Overall, there are many reasons to believe that the consumers’ role in pending economic recovery will be muted.
 The good news this past week was an unexpected improvement in the trade deficit. We may be seeing early signs of one sector that can help lead to an end of the recession and growth thereafter. The U.S. trade deficit in May unexpectedly narrowed on both a rebound in exports and a drop in imports. The overall U.S. trade gap shrank to $26.0 billion from a revised $28.8 billion shortfall the previous month. The May differential was the smallest since the $25.7 billion for November 1999. For the latest month, exports rebounded 1.6 percent while imports declined another 0.6 percent.
 The narrowing in the trade shortfall was seen in both petroleum and nonpetroleum components. The petroleum deficit shrank to $13.3 billion from $14.9 billion in April. The goods excluding petroleum shortfall narrowed to $22.7 billion from $23.8 billion in April. Surprisingly, the petroleum gap fell despite a jump in crude oil prices to $51.21 per imported barrel from $46.60 the month before. The number of barrels that were imported in May fell a sharp 10.5 percent.
Export growth was led by industrial supplies but gains were also seen in capital goods ex autos, consumer goods, and in foods, feeds & beverages. The automotive components declined moderately. The import decline was led by industrial supplies (which include oil) with decreases also found in automotive and consumer goods. Capital goods imports rebounded in the latest month—which suggests that U.S. businesses are not as negative about the need to boost equipment investment.
It’s too early to be absolutely certain, but we may have seen the end of the downturn in exports. As Asian economies rebound and eventually Europe, we should see stronger gains in exports. U.S. companies that are export dependent are likely to do better than most consumer-reliant businesses (health care being a possible exception).
 Oil prices continued to rise through the second week of June and that was enough to cause a big jump in prices for imported products during June—a huge 3.2 percent spike from May. Prices for imported petroleum surged 20.3 percent for the biggest gain in 10 years.
But outside of oil, price increases were tame. Excluding oil, import prices rose much less, 0.2 percent for a second increase in a row ending a long run of decreases. The end of non-oil price declines largely reflects a reversal in non-oil commodities prices as many of these were boosted headed into mid-June on the belief then that recovery was getting closer. Also, import prices for capital goods, autos, and consumer goods firmed modestly in recent months from recent downtrends. For June, these categories still were soft with capital goods actually slipping 0.1 percent while imports of consumer goods and imports of autos both rose 0.1 percent.
Looking ahead, the recent decline in oil prices will likely pull down overall import prices in July. Hence, the June report was hardly alarming on the inflation front.
 Although the consumer sector is in the doldrums, there was another sign this past week that the end of the recession is getting closer. ISM's non-manufacturing report showed a 3 point rise in the composite headline index to 47.0—clawing closer to the breakeven point of 50. Similarly, the new orders index jumped more than 4 points to 48.6.
New orders in the ISM's manufacturing report jumped above 50 in May before settling back to 49.2 in June. The 49.2 reading along with the non-manufacturing report's 48.6 suggest that month-to-month order rates in the economy are finally steadying.
Other indexes also moved close to the breakeven point--including backlog orders and business activity index. Essentially, there was a broad movement toward much slower contraction of activity—more signs of the recession easing. But businesses were both adjusting to lower levels of demand and cutting costs by drawing down inventories as the inventories index slipped 2 points to 45.0. However, leaner inventories mean that when recovery does come, there is less likelihood of a reversal due to excess merchandise on stockroom shelves.
The price index jumped nearly 7 points to 53.7, indicating positive growth in prices paid. The gain of course reflects a boost in energy costs and in various commodities.
There were both pluses and minuses last week—and that kind of choppiness should be expected as the rate of overall contraction slows. We will probably see plenty of uneven data, too, even after the onset of recovery, given that the improvement is expected to be sluggish. Nonetheless, a lesson to be learned from the past week is that we are going to have to pick and choose which sectors are going to be leaders in coming quarters. Exports are likely to be one while the consumer is more likely to sit on the sidelines to a large degree.
This coming week is jam packed with market moving indicators. On the inflation front, we will get updates on producer and consumer price inflation. Marquee indicators on consumer spending, manufacturing and housing show up with reports on retail sales, industrial production and housing starts. Believe it or not, the FOMC minutes play second fiddle this week.
The U.S. Treasury monthly budget report showed a massive deficit in May of $189.7 billion versus a year-ago May deficit of $165.9 billion. The deficit recently has been boosted by purchases of federal housing agency debt and outlays related to TARP. Year-to-date receipts were down 18 percent with year-to-date outlays up 19 percent. Looking ahead, the month of June typically shows a moderate surplus for the month. Over the past 10 years, the average surplus for the month of June has been $33.3 billion and $22.1 billion over the past 5 years.
Treasury Statement Consensus Forecast for June 09: -$97.0 billion
Range: -$100.0 billion to -$75.0 billion.
The producer price index inflation rate 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. The core PPI rate posted a 0.1 percent decrease in May, following a 0.1 percent uptick the month before. June will likely see a boost in the headline number on higher energy costs.
PPI Consensus Forecast for June 09: +0.8 percent
Range: +0.1 to +1.2 percent
PPI ex food & energy Consensus Forecast for June 09: +0.1 percent
Range: -0.2 to +0.7 percent
Retail sales in May were quite good at the headline level but after wading through the detail, the May gain was merely respectable. Overall retail sales rebounded 0.5 percent after falling 0.2 percent in April. Excluding motor vehicles, retail sales also made a comeback, gaining 0.5 percent, also following a 0.2 percent drop in April. However, a 3.6 percent jump in gasoline station sales was the primary factor behind the increase. Excluding motor vehicles and gasoline, retail sales edged up 0.1 percent after slipping 0.1 percent in April. Looking ahead, early indications from chain store sales are that retail sales are likely to be weak in June. Also, unit new motor vehicle sales declined slightly. However, the gasoline portion of retail sales is likely to be strong--oil prices in June jumped about $6 per barrel (roughly 11 percent) on a seasonally adjusted basis but contract oil prices will almost certainly dampen the increase.
Retail sales Consensus Forecast for June 09: +0.5 percent
Range: +0.1 to +1.0 percent
Retail sales excluding motor vehicles Consensus Forecast for June 09: +0.6 percent
Range: +0.2 to +1.5 percent
Business inventories fell a sharp 1.1 percent in April as businesses pared stockroom shelves much faster than the 0.3 percent dip in business sales. Looking ahead, we are likely to see another decline in business inventories. Preliminary numbers show a 0.6 percent decline in manufacturers’ inventories for May and a 1.4 percent drop in wholesale inventories.
Business inventories Consensus Forecast for May 09: -0.8 percent
Range: -1.2 to -0.7 percent
The consumer price index edged up 0.1 percent in May after no change the month before. 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. But looking ahead, a rise in gasoline prices will likely bump up the headline CPI temporarily for June.
CPI Consensus Forecast for June 09: +0.7 percent
Range: +0.3 to +0.8 percent
CPI ex food & energy Consensus Forecast for June 09: +0.1 percent
Range: 0.0 to +0.2 percent
The Empire State manufacturing index fell back in June to minus 9.41 from minus 4.55 the month before. Looking ahead to July, the June new orders index suggests that there may be little change in the overall index. New orders, which point to future production and shipments, were roughly unchanged at minus 8.15 from minus 9.01 in May.
Empire State Manufacturing Survey Consensus Forecast for July 09: -4.5
Range: -10.0 to 7.0
Industrial production in May dropped 1.1 percent, following a 0.7 percent fall in April. However, the manufacturing component was not quite 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 capacity utilization in May fell further to another new record low, dropping to 68.3 percent from 69.0 percent in April. Looking ahead, early indicators of manufacturing have been mixed. Production worker hours in manufacturing fell 1.2 percent in June, according to the latest employment report. Manufacturing surveys pointed in different directions for the month as the ISM rose closer to breakeven as did the Philly Fed Business Outlook Index. However, the Empire State index slipped further back into negative territory.
Industrial production Consensus Forecast for June 09: -0.7 percent
Range: -1.0 to -0.5 percent
Capacity utilization Consensus Forecast for June 09: 67.8 percent
Range: 67.5 to 67.9 percent
The Minutes of the June 23-24 FOMC meeting are scheduled for release at 2:00 p.m. ET. On their own, the minutes should be relatively tame since the Fed has been in a holding pattern on interest rates since December’s cut in the fed funds target to near zero. Also, the Fed has largely clarified that it intends to keep substantial amounts of liquidity in the financial markets though quantitative easing—by purchasing longer-term Treasuries, agency debt, and other securities. But markets have become uncertain about green shoots taking hold and any addition nuance in the minutes on the Fed’s view of the economy could push equities and bonds sharply in either direction.
Initial jobless claims in the July 4 week fell a very steep 52,000 to 565,000 -- the lowest level since the beginning of the year. However, the latest number benefitted from coming off auto layoffs and other layoffs in the manufacturing sector that had already happened. But continuing claims for the June 27 week jumped 159,000 to a new high of 6.883 million. Net, the most important factor is that new claims are coming down, pointing to eventual easing in continuing claims.
Jobless Claims Consensus Forecast for 7/11/09: 535,000
Range: 500,000 to 580,000
The general business conditions component of the Philadelphia Fed's business outlook survey 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. Looking ahead, the June improvement could continue into July—the new orders index improved substantially to a mere minus 4.8 from minus 25.9 in May.
Philadelphia Fed survey Consensus Forecast for July 09: -5.0
Range: -7.0 to 2.5
Housing 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 gain after falling 49.4 percent in April. Nonetheless, the single-family component gained 7.5 percent, following a 3.3 percent rise the month before. Don’t look for much improvement in June, however, as supply of single-family homes is still quite high and apartment vacancy rates have been rising.
Housing starts Consensus Forecast for June 09: 0.530 million-unit rate
Range: 0.500 million to 0.550 million-unit rate
Econoday Senior Writer Mark Pender contributed to this article.
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