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This past week, investors and traders had to look both ways before crossing the street. In one direction, earnings reports were coming in and in the other direction, economic news was hot and heavy. Overall, earnings were somewhat better than expected while most economic news showed the economy creeping toward the bottom of the recession.
 Anything could have happened this past week with earnings reports and a boat-load of economic news. But for the most part, the economic news surprised on the upside. Positive indicators were headline retail sales, Empire State manufacturing, industrial production, jobless claims, and notably housing starts. We will see that retail sales were not as good as the markets chose to believe, however. The only negative report was the Philly Fed manufacturing index and it posted only a mild reversal, remaining near breakeven. Overall, it was a good week for the economy and equities responded in kind. For many indexes, it was the best week in four months with weekly gains in the 7 and 8 percent vicinity.
It was a heavy week for financials’ quarterly reports. Goldman Sachs got the week off to an outstanding start after an announcement of an improved outlook by an analyst on Monday. Financials led equities up sharply for the day. During the week, Goldman Sachs, Citigroup, JP Morgan Chase, and Bank of America beat estimates. Bank of America, however, warned of tough times ahead for the rest of the year.
Techs did quite well after Intel beat sales forecasts on Wednesday. Also, the Fed’s improved GDP outlook helped major indexes gain 3 percent or more for the day. There was some speculation that Wednesday’s jump was driven in part by short covering.
Thursday provided an unusual twist for equities. Economist Nouriel Roubini spoke before a trade group and said that the worst of the financial crisis is over. He also was interpreted as meaning that the recession would likely end this year. However, after the close, Roubini issued a statement that markets had misinterpreted his comments and that he stood by an earlier statement that the recession would last 24 months. Friday’s good report on housing starts helped markets forget Roubini’s clarification as did healthy earnings reports.
However, the increased belief that CIT will likely file bankruptcy did weigh on markets somewhat Friday.
Equities were up this past week. The Dow was up 7.3 percent; the S&P 500, up 7.0 percent; the Nasdaq, up 7.4 percent; and the Russell 2000, up 8.0 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 0.4 percent; the S&P 500, up 4.1 percent; the Nasdaq, up 19.6 percent; and the Russell 2000, up 4.0 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields jumped sharply this past week. There were quite a few factors boosting rates. On Monday, a record federal deficit reminded traders of heavy supply now and coming. Throughout the week but especially on Tuesday, Wednesday, and Friday, reversal of flight to safety boosted yields as funds moved into equities. In tandem, economic news was generally positive with yields being notably sensitive to a good headline number for retail sales and improved numbers for Empire State, industrial production, and housing starts. An upgrade to the Fed’s GDP forecast also lifted rates.
For this past week Treasury rates were generally up as follows: 3-month T-bill, down 1 basis point; the 2-year note, up 10 basis points; the 5-year note, up 29 basis points; the 10-year bond, up 36 basis points; and the 30-year bond, up 35 basis points.
 Crude oil prices had two big days this past week. Spot prices for West Texas Intermediate jumped $1.95 per barrel on Wednesday after the government reported unexpectedly low inventories of crude. Crude stocks dropped 2.8 million barrels for the latest week. On Friday, oil traders took a more optimistic view of the economy and oil demand after a stronger-than-expected boost in housing starts for June. Crude spiked $2.37 per barrel for the day. Basically, the oil markets made a significant partial reversal from the prior week’s drop, believing that the economy is on track to recovery.
Net for the week, spot prices for West Texas Intermediate rose $4.34 per barrel to settle at $63.56.
There was no shortage of economic news this past week with updates on consumer spending, housing, manufacturing, and inflation. But the good news is that nearly all confirmed progress toward the end of the recession. However, we had to get past some ugly headline numbers on inflation. Fortunately, markets realized that much of the boost in inflation was due to temporary factors. But their temporary nature may not actually be temporary.
 The headline number for June retail sales got equities traders excited, but when you look at the details, the numbers actually were anemic. Overall retail sales posted a 0.6 percent gain after rebounding 0.5 percent in May. Excluding motor vehicles, retail sales gained 0.3 percent, following a 0.4 percent boost in May. The latest increase in overall sales was led by a 5.0 percent surge in gasoline station sales. Excluding motor vehicles and gasoline, retail sales slipped 0.2 percent after easing 0.1 percent in May.
Outside of gasoline and motor vehicles, sales were mixed but mostly down. Notably, building materials & garden equipment fell 0.9 percent. Consumers are eating at home more as food services & drinking places also declined 0.9 percent. General merchandise slipped 0.4 percent. On the positive side, gains were led by electronics & appliance stores and by sporting goods, hobby, book & music stores, both gaining 0.9 percent.
The June boost in retail sales shows a sluggish consumer sector once autos and gasoline are discounted. While the GDP bean counters raised their estimates for second quarter GDP due to a better-than-expected monthly trade deficit for May, the June retail sales report will have them nudging the second quarter back down.
 Because May was so strong, there was some speculation that June starts might ease a little. But starts in June instead posted a healthy gain. Starts now appear to have moved beyond the bottom for this sector – especially for the single-family component. Housing starts increased 3.6 percent, following a huge 17.3 percent spike in May. The June pace of 0.582 million units annualized was down 46.0 percent year-on-year. The boost in June 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.
 When you sort starts between single-family and multifamily components, a clear trend has emerged. Single-family starts hit bottom in February of this year and have been rising each month since.
Importantly, permits posted healthy increases in the latest two months, indicating that the strength in starts over that period may not be so much weather related. Permits came in with an 8.7 percent increase in June, following a moderate 4.0 percent rise in May. The June pace for permits at 0.563 million units annualized was down 52.0 percent on a year-ago basis.
Even though housing has turned up, there hardly is absolute certainty that the trend will be smooth. Housing is still at risk due to somewhat higher mortgage rates and rising foreclosure rates which could flood some local markets with supply of unsold homes.
 Another sign that we are getting closer to the bottom of recession is the slowing in contraction in industrial production. Overall industrial production in June fell 0.4 percent, following a revised 1.2 percent drop in May. Notably, the important manufacturing component also fell at a less rapid pace, decreasing 0.6 percent after dropping 1.1 percent in May. What stands out is that the rate of decline has eased significantly since December and January.
For the other major nonmanufacturing components in the latest month, utilities rebounded 0.8 percent while mining output declined 0.5 percent.
 One factor that suggests that manufacturing can only improve from current levels is the extremely weak pace of motor vehicle assemblies. In June, the decline in manufacturing was led by motor vehicles & parts which decreased 2.6 percent after plunging 8.2 percent in May. Autos and light trucks were produced at a 3.95 million unit annualized pace in June – down from 4.19 million units in May. Production has been hurt by fears by consumers that Chrysler and GM would file bankruptcy which indeed happened. Now that Chrysler and GM can move forward, sales may start creeping higher with production following. Motor vehicle assembly rates hit an historical low of 3.71 million units in January 2009 for a series going back to January 1977.
Overall capacity utilization in June dropped to another record low, declining to 68.0 percent in June from a revised 68.2 percent in May. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.
Two key manufacturing surveys moved in opposite directions this past week. But both still show manufacturing in their regions declining at only an incremental pace. We have two additional signs that the recession in manufacturing may be ending soon. However, there are no indications that recovery will be strong.
 The Empire State general business conditions index rose to minus 0.55 in July from minus 9.41 in June. 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. Shipments also shifted into growth mode, coming in at 10.97 versus May's minus 4.84. Prices paid firmed, likely on energy and non-energy commodities.
The road to recovery in the manufacturing sector is not a straight path as indicated by the Philly Fed’s business activity index which fell back in July to minus 7.5 from minus 2.2 in June. Nonetheless, the index is not far from breakeven and remains 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. Overall, manufacturing in New York State and in the mid-Atlantic region is getting closer to recession bottom.
 Business inventories are having very different effects on current quarter GDP growth and expected GDP growth in the second half.
Businesses continued to destock in May with inventories dropping 1.0 percent after decreasing 1.3 percent the month before. Business inventories have fallen for nine straight months through May. Businesses have been destocking at a greater rate than sales have falling. Business sales fell only 0.1 percent in May, compared to a 0.3 percent decline in April.
In the latest month, retail inventories fell 1.6 percent and were down 0.6 percent excluding autos. Except for grocery stores, inventories were drawn in all retail categories for a second month straight. Factory inventories decreased 0.6 percent in May while wholesale inventories were down 0.8 percent.
The lower inventory figure for May will probably have a notable impact on second quarter GDP estimates—with projections being lowered. While there are clear signs that the recession is easing, it is increasingly likely that you will not see a dramatic difference between the second quarter decline in real GDP and that for the first quarter.
But, looking ahead, if sales stabilize, businesses are going to need to add to their shelves. New orders will boost production and this is a key reason many – including the Fed – predict positive GDP growth in the second half of the year. Notably, the increased downward swing in inventories contributed significantly to the drop in GDP in the first quarter. If the rate of decline slows or even flattens, this will add to GDP. An actual rise in inventories – however modest – would have a major impact on boosting GDP because of the large swing from negative to positive changes in growth.
 Consumer price inflation has made quite a turnaround from late 2008 when the Fed was worried about deflation. Inflation jumped notably in June but fortunately most of the surge was based on temporary factors. However, there still is not the softness in prices that the Fed had expected to result from the recession. In June, consumer price inflation jumped and on higher gasoline prices but other components also added to the spike. The headline CPI surged 0.7 percent, following a 0.1 percent uptick in May. In the latest month, energy costs posted a 7.4 percent hike while food price inflation was unchanged. Meanwhile, core CPI inflation firmed to 0.2 percent in June from a 0.1 percent uptick in May. The market expectation was for a 0.1 percent gain for the core.
The 7.4 percent boost in energy costs was due to a 17.3 percent spike in gasoline prices after a 3.1 percent gain in May. Heating oil rose 2.0 percent while piped gas and electricity declined 1.2 percent.
Some temporary factors appear to have boosted the core also. New & used motor vehicles advanced 0.4 percent and this jump likely reflected the ending of special promotions. With auto sales so weak, continued price hikes are highly unlikely. Apparel jumped 0.7 percent, probably due to less than typical end-of-season discounting with inventories being kept lower than usual. Recreation gained 0.5 percent (largely on admission fees and for cable and for satellite television and radio). Tobacco and smoking products increased 0.8 percent as more state and local governments boosted tobacco taxes to gain revenues. It’s hard to tell when this tax hike trend is going to end.
On the soft side were rent of primary residence and owners’ equivalent rent, both rising 0.1 percent. This is one facet of inflation that indeed has been affected by the recession. Apartment vacancy rates are up as household formation has slowed and as a big share of unemployed moves in with someone else. Rental houses competing in an environment with high vacancy rates for apartments dampens inflation for owners’ equivalent rent since it is based on rents for comparable houses in the rental market.
 On a year-ago basis, headline inflation dropped to down 1.2 percent (seasonally adjusted) in June from down 1.0 percent in May. Meanwhile, the core rate eased to up 1.7 percent from up 1.8 percent in May.
There is more than one story in the latest CPI report. Yes, the spurt in energy costs likely was temporary for now. But oil prices are probably as low as they are going to go for the rest of the recession. In 2010, rising oil prices easily may contribute to higher inflation. Also, the core rate is not where the Fed had hoped just a few months ago. The core rate is barely within the Fed’s implicit target zone of 1-1/2 to 2 percent. And the worst of the recession is behind us according to many economists. There is good reason for the inflation hawks to be worried about inflation pressures building quickly if the Fed is too slow in reversing its balance sheet expansion.
 The producer price index report for June was affected by many of the same factors as the CPI. Producer price inflation in June jumped sharply at the headline level due to higher energy costs. The core also was high and largely due to higher motor vehicle prices. The overall PPI spiked 1.8 percent in June, after increasing 0.2 percent in May. The latest gain was led by the energy component which jumped 6.6 percent. The food component also posted a large gain—1.1 percent.
Meanwhile the core PPI rate advanced 0.5 percent, coming in much higher than 0.1 percent decline in May. Boosting the core rate were a 2.0 percent jump in auto prices and a 3.4 percent surge in light truck prices.
For the overall PPI, the year-on-year rate fell to minus 4.3 percent from minus 4.7 percent in May (seasonally adjusted). The core rate year-ago pace firmed to up 3.4 percent from up 3.0 percent the prior month.
There was good news and bad news from the minutes for the June 23-24 FOMC meeting. They showed a Fed seeing its monetary policy progressing much as hoped, although the Fed did make some changes in its economic outlook. FOMC members saw no need to expand its balance sheet further than already planned. The Fed’s focus was on planning to develop the needed tools to unwind its vastly expanded balance sheet.
For those watching the Fed’s balance sheet, staff projections suggested that the size of the Federal Reserve’s balance sheet might peak late this year and decline gradually thereafter. Given the improvement in the financial markets, the Fed’s key focus is preparing to withdraw current policy accommodation in a timely manner. Basically, the inflation hawks are pushing to make sure markets know the Fed is not going leave such large amounts of liquidity in the credit markets long enough to fuel inflation.
For the economic outlook, we got updates from the Fed staff economists as well as from the FOMC participants (Fed governors and District Bank presidents). The Fed staff revised its GDP growth projections up for both the remainder of 2009 and for 2010. But the staff also boosted its forecasts for unemployment and core inflation. However, core inflation was still expected to ease in coming quarters.
The FOMC participants’ (Fed governors and District Bank presidents) changed their forecasts similarly. Basically, FOMC participants still see a return to positive growth during the second half 2009. However, growth is expected to be “sluggish” during the second half. The recovery in 2010 is projected to be gradual. Most participants indicated that they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal Reserve’s dual objectives, but several said full convergence would take longer.
 Looking at specific numbers, the central tendency range for real GDP in 2009 was raised to -1.5 percent to -1.0 percent from a range of -2.0 percent to -1.3 percent in April. The 2010 forecast was bumped up to a range of 2.1 percent to 3.3 percent from April’s range of 2.0 percent to 3.0 percent. The FOMC now expects the unemployment rate to hit between 9.8 percent to 10.1 percent in the fourth quarter of 2009 from the April projection of 9.2 percent to 9.6 percent and then ease slowly in 2010 and 2011. The forecast pattern for unemployment indicates that the Fed believes it will be at least 2012 before the unemployment rate returns to pre-recession levels.
 The Fed keeps bumping up its inflation forecast. Apparently, the recession has not eased inflation pressures as much as previously anticipated. PCE inflation is projected to range from 1.0 percent to 1.4 percent in 2009 and rise to a range 1.2 percent to 1.8 percent in 2010. The Fed is no longer citing any significant concern about deflation. But inflation is back near or just at the bottom of the Fed’s implied inflation target range of about 1-1/2 to 2 percent.
 The Fed’s forecast for core inflation (excluding food and energy) was bumped up for 2009, 2010, and 2011. This likely would be due to actual headline and core inflation being higher than expected thus far this year. What would have been unbelievable two years ago, the Fed's core PCE inflation forecast is less than or right at 1-1/2 percent for three consecutive years, currently through 2011. The lower core rate is seen due to the indirect effects of lower energy costs and continued weakness in resource utilization. However, the fact that the Fed keeps on raising its forecast for both headline and core inflation makes their forecast for easing in inflation a little suspect.
Overall, the minutes confirm that the Fed see the economy on track for recovery later this year—albeit a fragile recovery. Also, unemployment is still expected to lag the overall economy.
It was mostly a positive week for economic news. The biggest negative was one that markets chose to ignore—retail sales were flat after discounting gasoline and autos. We are getting closer to the end of recession, but again, signs are that the consumer sector will remain sluggish. But we finally appear to be getting some lift from housing.
It’s a light week for economic news with no major indicators. Still, existing home sales will get a fair amount of attention after this past week’s surprisingly good news on housing starts. Also, any news on the consumer sector is more sensitive than usual and that’s likely the case with consumer sentiment on Friday. With some economists seeing the economy near the bottom of recession, the index of leading indicators will get more attention than usual.
The Conference Board's index of leading indicators spiked 1.2 percent in May, topping the 1.1 percent jump in April that ended a long run of declines. These gains suggest a bottoming of recession in the months ahead. But looking ahead, we are likely to a moderation of this strength in June. Two of the biggest movers on the upside may be initial claims and housing permits.
Leading indicators Consensus Forecast for June 09: +0.5 percent
Range: -0.5 to +0.9 percent
Initial jobless claims fell a sharp 47,000 to 522,000 in the July 11 week. The four-week average is down 22,500 to 584,500. Continuing claims really plunged, dropping by 642,000 to 6.273 million. But the Labor Department warned that results for both initial and continuing claims were affected by prior layoffs in the manufacturing sector, layoffs that are largely seasonal and that happened earlier than usual this year. If not this week, we are likely to see a technical reversal and worsening later this summer.
Jobless Claims Consensus Forecast for 7/18/09: 560,000
Range: 535,000 to 590,000
Existing home sales in May advanced another 2.4 percent to a 4.770 million annual rate. The really good news was that supply fell to 9.6 months from 10.1 months in April. While it is unrealistic to expect a surge in sales anytime soon because of the worsening unemployment situation, we may have moved past the bottom in sales. Unfortunately, a notable percentage of sales in the near term will likely be purchases by investors of distressed properties. For June we are likely to see a modest gain based on pending home sales. Although pending home sales edged up only 0.1 percent in May, this uptick followed several months of strong gains, including 7.1 percent in April. Some of this momentum in pending sales (based on down payments) will likely carry through to existing home sales (based on closings) in June.
Existing home sales Consensus Forecast for June 09: 4.85 million-unit rate
Range: 4.65 to 4.90 million-unit rate
The Reuter's/University of Michigan's Consumer sentiment index in mid-July fell more than 6 points to 64.6. 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. Recent news on the economy has been a little better with equities rebounding and initial jobless claims coming down. But the recent jump in the unemployment rate may still be at the forefront of consumer worries.
Consumer sentiment Consensus Forecast for final July 09: 65.0
Range: 64.0 to 68.0
Econoday Senior Writer Mark Pender contributed to this article.
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