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Second quarter GDP showed the recession easing significantly. And more recent monthly indicators mostly have been positive. It’s still recession, but the odds are it won’t be for long. But investors need to be aware of the fact that the recovery will not be typical—it will be weaker than average and the consumer will be a lot more cautious about spending.
 Equities have been on a three-week winning streak as economic data point to an ending of the recession soon. Economic news was mixed but netted positive for the week. New home sales helped lift stocks on Monday but a drop in consumer confidence on Tuesday sent equities down despite a gain in the Case-Shiller home price index. The durable goods report on Wednesday posted a much larger-than-forecast drop at the headline level and that bumped stocks down.
Equities got help from economic news the last two days of the week as initial jobless claims indicated a stabilization of the jobs market while second quarter GDP declined slightly, coming in better than many estimates by Wall Street economists.
But earnings still played a net positive role for the week. So far, for companies in the S&P 500, about three-fourths of the earnings reports for the second quarter have topped expectations. The big boost came on Thursday after Motorola beat expectations and after legislators backed off on whether GE should spin off its troubled GE Capital unit and after Goldman Sachs upgraded GE. Bank stocks generally rose on lower interest rates. However, for the week the energy patch generally slumped on down numbers for consumer confidence.
By week end, an unexpected topic also lifted stocks—the administration’s cash for clunkers program to boost auto sales. Qualifying older gas guzzlers could get up to $4,500 credit for the purchase of newer, more gas efficient cars. The $1 billion allocated for the program ran out faster than expected, boosting sales for about 250,000 car purchases. On Friday, the House extended the program with another $2 billion with the Senate expected to take up the matter this coming week.
 Equities were up moderately this past week. The Dow was up 0.9 percent; the S&P 500, up 0.8 percent; the Nasdaq, up 0.6 percent; and the Russell 2000, up 1.5 percent.
Equities were up sharply in July. The Dow was up 8.6 percent; the S&P 500, up 7.4 percent; the Nasdaq, up 7.8 percent; and the Russell 2000, up 9.5 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 4.5 percent; the S&P 500, up 9.3 percent; the Nasdaq, up 25.5 percent; and the Russell 2000, up 11.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were mixed for the week as bond and longer-maturity notes rates fell significantly while yields on shorter-maturity notes rose. Supply concerns boosted yields for the 2-year and 3-year notes. Economic data came into play in the decline of yields on the 7-year T-note, the 10-year T-note, and 30-year T-bond. Early in the week, a strong new home sales number boosted yields. But long rates came down on a decline in consumer confidence and in overall durables orders. Although second quarter GDP was either in line with expectations or better than expectations (depending on the survey), the bond market at week's end focused on the weaker-than-expected personal spending component in GDP. Also, the GDP inflation number was softer than anticipated with the overall GDP price index rising a mere 0.2 percent annualized in the second quarter. By close of the week, traders had decided that inflation pressures were lower. The Treasury curve flattened because of lower inflation expectations due in part to a more sluggish consumer sector.
For this past week Treasury rates were mixed as follows: 3-month T-bill, unchanged; the 2-year note, up 11 basis points; the 5-year note, down 2 basis points; the 7-year note, down 10 basis points; the 10-year bond, down 18 basis points; and the 30-year bond, down 25 basis points.
 Crude oil prices netted a notable gain for the week despite sharp intraweek swings. Supply and mixed economic news both came into play. Yes, economic news was mixed but the positives won out by week end. The negative economic news was a drop in consumer confidence on Tuesday and a headline fall in durables orders on Wednesday. The positives were a boost in new home sales on Monday, better-than-expected initial jobless claims on Thursday and a better-than-expected gain in the Chicago PMI at week end.
Wednesday’s crude oil inventories were higher-than-expected and pushed spot prices for West Texas Intermediate down at mid-week. But going in the other direction, a declining dollar helped boost crude oil prices the last two days of the week.
Overall, the economy is looking a little stronger than anticipated and that is lifting crude prices.
Net for the week, spot prices for West Texas Intermediate rose $2.78 per barrel to settle at $69.45. Crude has risen three weeks in a row for a net gain of $10.23 per barrel over the period.
The economic news was mixed but mostly positive. Despite a drop in consumer confidence, a less negative second quarter GDP number, a boost in new home sales and home prices, and a rise in the Chicago purchaser report all pointed to a nearing of the end of recession.
 The recession’s grip on the economy is easing based on the latest GDP report. The economy contracted in the second quarter by only 1.0 percent, following a revised 6.4 percent drop in the first quarter. The second quarter was close to the market consensus for a 0.7 percent dip. The previous estimate for the first quarter decline was 5.5 percent.
Real GDP has now fallen for four consecutive quarters—the longest negative streak on record since the Commerce Department began keeping records starting in 1947. This, of course, does not take into account the Great Depression in the 1930s.
Weakness in the current quarter was almost offset by component strength. Pulling down GDP in the latest quarter were business fixed investment, housing, personal consumption, and inventories. Strength was found in a sharp narrowing in the trade gap and a rebound in government spending.
The good news in the report was not just that the rate of contraction has slowed but that one key part of the composition of GDP was favorable. Inventories continued to fall—by $141.1 billion in the second quarter, following a $113.9 billion drop in the first, and a $37.4 billion fall in the fourth quarter. At some point soon—and there is a chance it will be the third quarter—businesses will have to start rebuilding inventories. Already, the “cash for clunkers” federal subsidy for purchases of certain high efficiency autos has nearly depleted inventories of some motor vehicles.
Final sales have not been as weak as overall GDP for the last three quarters. Final sales slipped only an annualized 0.2 percent in the second quarter, following a 4.1 percent decline in the first quarter.
Unfortunately, a notable weak spot in final sales was a 1.2 percent annualized drop in personal consumption expenditures, following a 0.6 percent rise in the first quarter. The dip in the most recent quarter was more than expected by many economists. But for those who have been paying attention, this sluggishness in the consumer sector should not be a surprise and continued softness in coming quarters should already be built in. But there likely has been a little denial still going around.
Year-on-year growth for real GDP declined by 3.9 percent, after contracting 3.3 percent in the prior quarter.
On the inflation front, the GDP price index rose a meager 0.2 percent after gaining a revised 1.9 percent in the first quarter. The first quarter increase previously had been estimated to be 2.8 percent annualized. The consensus had expected a 1.3 percent gain for the second quarter.
 The latest GDP release includes historical revisions and an updating of the base year from 2000 to 2005. The historical revisions to GDP broadly show the current recession was deeper than earlier believed. All but one quarter of the recession were revised down. The first quarter of 2009 was revised down to a 6.4 percent decline and was the largest quarterly decline since the first quarter of 1982 which fell 6.6 percent. The downward revision to the first quarter primarily was due a lower estimate for PCEs growth from up 1.4 percent to up 0.6 percent.
The most significant revisions were for 2008 overall. On an annual average basis, growth was revised to 0.4 percent from the prior estimate of 1.1 percent. On a fourth-quarter-over-fourth-quarter basis, 2008 was revised to minus 1.9 percent from minus 0.8 percent.
 Looking ahead, low inventories point to a rebound in production in the third quarter with motor vehicles almost certainly to be a sizeable contribution. However, the consumer will likely lag. Nonetheless, the latest numbers strengthen the case for a rebound in the second half and possibly even the third quarter.
 More current economic data point to positive growth ahead. New home sales jumped 11.0 percent in June to a higher-than-expected annual rate of 384,000 and the highest rate this year. The month-to-month percentage change is the highest in nearly nine years. Most importantly, the strong sales drew down supply which fell from May's 10.2 months to 8.8 months for the lowest reading in nearly two years. The number of new homes on the market, at 281,000, is the lowest in 11 years.
However, the median price tumbled 5.8 percent in the month to $206,200. The year-on-year price change fell to minus 12.0 percent from May's minus 4.5 percent. The median price probably fell due to a much higher percentage of sales on the low end even though there likely was modest price cutting also.
 Many economists have said for some time that the economy will not improve until housing stabilizes—notably on the price front. We are starting to see signs of that despite the drop in the median price for new homes. Remember, both the new homes and existing homes price series are affected by the mix of homes sold—high end versus low end. Home prices for individual homes could stay unchanged but if a greater percentage of high end homes are sold, that would raise the median price and vice versa should it be the low end gaining share.
 But the Standard & Poor’s Case-Shiller home price index is a repeat transaction measure—it is not affected by shifting composition of the types of sales. The Case-Shiller 10-city composite index for May rose 0.4 percent and the 20-city composite gained 0.5 percent. May was the first monthly gain in three years. Rates of year-on-year decline are also easing, now at 16.8 percent for the 10-city composite and at 17.1 percent for the 20-city composite. Year-on-year rates were at nearly minus 20 percent at the beginning of the year.
 However, a curiosity about the S&P Case-Shiller numbers is that they are not seasonally adjusted even though seasonally adjusted numbers are available on the Standard & Poor’s web site. The seasonally adjusted month-ago percent change for the 20-city composite came in at down 0.2 percent, following a 0.8 percent decline in April. While the seasonally adjusted index is still negative, the trend is favorable as home prices appear to be close to stabilizing.
 The latest report on durables orders was a reminder more than anything of how volatile the series is—and largely due to sharp swings in aircraft orders. Specifically, new factory orders for durables in June dropped sharply, largely on a plunge in civilian aircraft orders. Durable goods orders fell back 2.5 percent in June, following a revised boost of 1.3 percent the month before. The big negative in June was transportation which dropped 12.8 percent within which civilian aircraft orders fell 38.5 percent.
But excluding the transportation component, new durables orders advanced 1.1 percent, following a 0.8 percent gain in May. Showing gains were primary metals, machinery, and electrical equipment, up 0.9 percent. Basically, the June numbers confirmed the problems that Boeing is having with delivering the 787 Dreamliner and with the recession causing airlines to postpone or cancel orders. Overall, new orders are still on an uptrend.
Another positive for future production was another drop in durables inventories—which declined 0.9 percent in June after a 1.1 percent drop the prior month. Low inventories mean that at some point, manufacturers will have to boost production.
 The latest consumer confidence report is another sign that the consumer sector is going to remain sluggish for some time. The Conference Board's consumer confidence index fell a sizable 2.7 points to 46.6 in July. Consumers are most worried about the job picture as 48.1 percent of consumers said jobs are hard to get, up from 44.8 percent in June and 43.9 percent in May. Consumers do not see the jobs situation getting better soon. Only 15.0 percent in May expect more jobs six months out versus June's 17.5 percent. In turn, only 9.5 percent of consumers see an improvement in income six months from now, down from June's 10.1 percent. More also see a decrease in their income, at 18.8 percent for a 6 tenth increase. These views do not bode well for retail sales as job worries will help keep wallets tucked away.
Another sign of the recession easing is the latest ISM-Chicago report.  The Business Barometer rose to 43.4 in July from 39.9 the month before. The latest is closer to the breakeven point of 50—meaning the rate of contraction in the Chicago area economy has slowed. There may be further improvement next month as the new orders component jumped 6.4 points to a nearly break-even 48.0.
There are still imbalances led by rapid destocking of inventories as businesses bring down cash expenses. The inventories index fell nearly 9 points to 25.4, a reading indicating that inventory levels fell significantly for a great share of Chicago. This means we are likely to get some lift in production from inventory rebuilding—especially with the return of GM and Chrysler production. Prices paid fell slightly to 35.0 reflecting month-to-month contraction in energy prices and also the general absence of pricing power.
According to the latest Beige Book, the recession is gradually nearing end. The Beige Book prepared for the August 11-12 FOMC meeting stated that the economy "continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated." For the all-important consumer sector, most Districts reported retail activity to be "sluggish." Labor markets are described as soft. Some Districts noted improvement in housing markets. However, commercial real estate—a relatively new concern—was found to have weakened further in recent months. Reports on the manufacturing sector remained subdued but were slightly more positive than in the previous Beige Book due to the need to replenish inventories.
The credit markets are still a concern. Overall lending activity was stable but low or weakening further for most loan categories. Mortgage lending is down and commercial & industrial loans fell or remained weak.
Upward price pressures were described as minimal although some materials prices had risen.
The latest numbers indicate that the recession eased significantly in the second quarter. Recovery is increasingly likely in the second half with a good chance of it starting before the end of the third quarter. However, the recovery will have to make do without a robust consumer sector. Strength will likely be in inventory rebuilding, exports, housing, and housing-related goods.
The consumer gets the spotlight this week with personal income out on Tuesday and the July jobs report on Friday. But we also get a hint as to whether manufacturing pulled out of recession in July with Monday’s ISM report.
The Institute for Supply Management's manufacturing index in June rose 2 points to 44.8. But we may see some reversal in July. The June new orders index fell back into negative territory, declining nearly 2 points 49.2, a contractionary reading. But on the other hand, but inventories appear to be lean, with the customers inventory index down 2-1/2 points to 43.5. Inventories at respondents' firms, also shows destocking, at 30.8 for a more than 2 point fall. While we may not see further improvement in the composite index in July, the likely need for inventory rebuilding soon suggest that forward momentum is still building.
ISM manufacturing index Consensus Forecast for July 09: 46.5
Range: 44.1 to 49.0
Construction spending declined 0.9 percent in May after gaining 0.6 percent in April. The reversal in outlays in May was led by a 3.4 percent drop in residential outlays, followed by a 0.6 percent decline in public construction. Nonresidential outlays gained 0.5 percent. Looking ahead, healthy gains in housing starts of 17.3 percent in May and 3.6 percent in June could push the residential component of outlays back up. But the public component is still being weighed down by declines in state & local government revenues and nonresidential outlays are on an easing trend due to lower corporate profits, less cash on hand, and cutbacks in commercial lending.
Construction spending Consensus Forecast for June 09: -0.5 percent
Range: -2.0 to -0.1 percent
Personal income posted a huge 1.4 percent gain in May, following a 0.7 percent boost in the month before. The advance in personal income was led by one-time payments under the American Recovery and Reinvestment Act of 2009. In contrast, the wages and salaries component slipped 0.1 percent after an increase of 0.1 percent in April. Consumer spending actually made a moderate comeback with a 0.3 percent gain after no change the month before. On the inflation front, the headline PCE price index edged up only 0.1 percent in May with the core PCE price index rising by the same amount. Looking ahead, we will get historical revisions to personal income with the release of June data. Recent releases of key source data suggest a decline in at least wages & salaries as June aggregate weekly earnings fell 0.3 percent. The goods portion of nominal PCEs should rise as retail sales advanced 0.6 percent in June. Both the headline PCE and core PCE prices indexes should firm as the CPI jumped 0.7 percent while the core CPI increased 0.2 percent.
Personal income Consensus Forecast for June 09: -1.1 percent
Range: -1.5 to -0.5 percent
Personal consumption expenditures Consensus Forecast for June 09: +0.3 percent
Range: +0.1 to +0.6 percent
Core PCE price index Consensus Forecast for June 09: +0.2 percent
Range: +0.1 to +0.6 percent
Factory orders in May jumped 1.2 percent. Strength was in durables but nondurable goods orders were boosted by somewhat higher oil-related prices, rose 0.7 percent. Notably, May was a strong month for aircraft but other components generally were solid. But the latest advance report on durables orders for June reversed direction with a sharp 2.5 percent drop. Most of the weakness was in civilian aircraft orders as excluding transportation, durables still rose 1.1 percent in June. So it is almost guaranteed that the headline factory orders number will be quite negative although higher oil prices will likely boost nondurables. Markets will likely focus on any revisions to durables excluding transportation.
Factory orders Consensus Forecast for June 09: -0.9 percent
Range: -2.1 to 0.0 percent
The composite index from the ISM non-manufacturing survey in June advanced by 3 points 47.0—clawing closer to the breakeven point of 50. The June index will likely at least hold steady as the new orders index in June jumped more than 4 points to 48.6—also near breakeven.
Composite index Consensus Forecast for July 09: 48.2
Range: 46.6 to 49.0
Initial jobless claims for the week ended July 25 jumped 25,000 to 584,000. After swings related to earlier-than-seasonal layoffs in manufacturing—notably in the auto sector—it appears that initial claims have returned to trend. Still, if the high 500s is the new trend, this indicates easing layoffs from the mid 600 level before the distortions appeared. Continuing claims fell 54,000 to 6.197 million for the week ended July 18 and came in much lower than prior weeks but likely reflected the expiration of benefits and not necessarily new employment.
Jobless Claims Consensus Forecast for 8/1/09: 575,000
Range: 550,000 to 600,000
Nonfarm payroll employment in June declined 467,000, following a fall of 322,000 in May. However, layoffs of temporary workers for the upcoming 2010 census accounted for a notable part of June’s job losses. In June, the average workweek slipped from 33.1 hours in May to an extremely weak 33.0 hours—the lowest level on record for the series, which began in 1964. Average hourly earnings were unchanged after rising 0.2 percent in May. The civilian unemployment rate rose to 9.5 percent from 9.4 percent in May with the latest number the highest since August 1983.
Nonfarm payrolls Consensus Forecast for July 09: -300,000
Range: -375,000 to -190,000
Unemployment rate Consensus Forecast for July 09: 9.7 percent
Range: 9.5 to 9.8 percent
Average workweek Consensus Forecast for July 09: 33.1 hours
Range: 33.0 to 33.2 hours
Average hourly earnings Consensus Forecast for July 09: +0.1 percent
Range: 0.0 to +0.3 percent
Consumer credit outstanding credit contracted $3.2 billion in May after a huge drop of $16.5 billion the month before. Consumers clearly are cutting back on credit card use and bank’s have been cutting back on credit limits. May's contraction was centered in revolving credit, at $2.9 billion on top of April's $8.7 billion contraction.
Consumer credit Consensus Forecast for June 09: -$4.2 billion
Range: -$10.0 billion to -$3.0 billion
Econoday Senior Writer Mark Pender contributed to this article.
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