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The highlight of this past week was a better-than-expected jobs report. Given the importance of the consumer sector to economic recovery, the markets paid a lot of attention and gave a sigh of relief on the good news, sharply boosting equities. But despite a surge in auto sales, not everything is rosy for the consumer sector. Nonetheless, lost in the hoopla over the July employment situation were further signs of incremental recovery already underway in housing. Overall, while the economic road is still bumpy, the data point to the end of the recession being very near—but there still is no sign of the recovery being strong.
 Equities were on a roller coaster this past week but ended the week up quite nicely. Earnings were mixed but stocks were mainly driven by economic news. Stocks were boosted on Monday by gains in the ISM manufacturing index, the China PMI, and strong auto sales. Pending home sales were unexpectedly strong on Tuesday and lifted equities slightly as personal income fell about as expected. But a very negative ADP employment report on Wednesday along with a retreat in the ISM non-manufacturing index sent stocks down. The glum mood continued through Thursday as traders worried about a possible reversal of the trend of the jobs contraction easing. The actually jobs numbers were notably better than expected, boosting equities sharply on Friday. Basically, equities traders concluded that the recession is nearing an end.
Equities were up this past week. The Dow was up 2.2 percent; the S&P 500, up 2.3 percent; the Nasdaq, up 1.1 percent; and the Russell 2000, up 2.8 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 6.8 percent; the S&P 500, up 11.9 percent; the Nasdaq, up 26.8 percent; and the Russell 2000, up 14.6 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 significantly this past week with yields rising notably every day except for Thursday. Generally favorable economic news and stock market gains were key reasons for the boost in rates.
A jump in the ISM manufacting index boosted yields sharply on Monday on the belief that the economy was stronger than anticipated. A spike in equities for the day also led to reversal of flight to safety as investors jumped on the equities bandwagon. Other key economic news boosting yields were strong pending home sales and, of course, the July employment situation. Yields rose on Wednesday despite a very negative ADP employment report as Goldman Sachs raised its economic forecast and after the Treasury announced it plans to sell a record $75 billion of notes and bonds in this coming week’s auctions.
For this past week Treasury rates were mostly up sharply as follows: 3-month T-bill, down 1 basis point; the 2-year note, up 18 basis points; the 5-year note, up 31 basis points; the 7-year note, up 36 basis points; the 10-year bond, up 37 basis points; and the 30-year bond, up 31 basis points.
 Oil prices rose significantly over the past week with economic data playing key roles. But the big boost was not on Friday after the jobs report but on Monday. Spot prices for West Texas Intermediate jumped over $2 per barrel, topping $71 per barrel at the end of the day for the first time since the end of June. Prices surged on notable gains in both the China PMI and in the U.S. ISM manufacturing index. Oil prices have been very sensitive to signs of growth in both Asia and in the U.S. Lower-than-expected U.S. inventories also boosted prices at mid-week. A rise in the dollar on Friday tapped down crude prices at week end.
Net for the week, spot prices for West Texas Intermediate rose for the fourth week in a row, gaining $1.48 per barrel to settle at $70.93.
Economic data were mixed this past week but mostly positive. Despite a better-than-expected jobs report and a spike in auto sales, other economic data show a consumer sector that is still in ill health.
 The July jobs report was another indication that recession is near end. The good news is that the monthly job loss is at the lowest in a year. The unemployment rate surprisingly dipped—but the detail indicates that is not good news.
Nonfarm payroll employment in July shrank 247,000, following a revised decline of 443,000 in June and a revised drop of 303,000 in May. Declines in the prior two months were not as bad as earlier believed. June and May revisions were up a net 43,000. The July decrease in payroll employment was the smallest since a 175,000 decline for August 2008.
The easing in job losses was broad-based. By major categories, goods-producing jobs fell 128,000 in July, following a 223,000 loss the month before. The July decline was led by a 76,000 drop in construction employment while manufacturing dipped only 52,000. Within manufacturing, motor vehicles actually rose 28,000. Service-providing jobs contracted by 119,000 in July after falling 220,000 in June. The trade & transportation subcomponent fell 87,000. Education & health services actually rose 17,000 with leisure & hospitality also up 9,000 and government up 7,000.
 Wage inflation returned more to normal in July as average hourly earnings rose 0.2 percent after no change June. But the trend is still one of softening. On a year-ago basis, average hourly earnings eased to 2.5 percent from 2.7 percent in June.
From the household survey, the civilian unemployment rate unexpectedly slipped to 9.4 percent from 9.5 percent in June. But the decline was due to a sizeable drop in the labor force—which plunged 422,000 in July. Meanwhile, the household employment fell 155,000 and the number of unemployment decreased 267,000. Basically, more workers became discouraged and dropped out of the labor force, no longer actively seeking a job.
But overall, the July report indicates that the recession is almost over. But did it end in July' It is very uncertain based on available data but still possible. The end of the recession will be based mostly on the four components that go into the Conference Board’s coincident index—payroll jobs, industrial production, personal income less government transfers, and business sales. The payroll jobs component will be negative based on the loss in the July jobs report. But we could get increases in industrial production and in personal income based on a 0.4 percent boost in manufacturing production workers and a 0.2 percent rise in aggregate weekly payrolls. Also, business sales may be up due to motor vehicles sales spiking. It likely will be a close call whether July was a positive for coincident indicators and whether the recession ended in July. Either way, it raises odds that growth will be positive in August.
 Consumer had less income to spending in June but pried open their wallets nonetheless—primarily to pay for higher priced gasoline. Personal income fell a sharp 1.3 percent after jumping a revised 1.3 percent in May. June's fall was primarily due to a 5.9 percent fall in transfer payments which had spiked 8.0 percent in May from one-time payments under the American Recovery and Reinvestment Act of 2009. In the latest month, the wages and salaries component dropped 0.4 percent after dipping 0.1 percent in May.
 At face value, consumer spending looked moderately healthy, jumping 0.4 percent after edging up 0.1 percent in May. However, June's gain was price related from higher gasoline prices. The boost in consumer spending was led by a 1.7 percent surge in nondurables which includes gasoline. Durables slipped 0.2 percent while services edged up a meager 0.1 percent.
After discounting inflation, real consumer spending actually slipped 0.1 percent in June, following no change the month before.
 The Fed has to be worrying about the direction of oil prices. PCE inflation made a strong comeback on energy costs. The headline PCE price index spiked 0.5 percent, following a 0.1 percent uptick in May. Meanwhile, the core PCE price index firmed to a 0.2 percent increase in June after edging up 0.1 percent in May.
But on a year-ago basis, inflation is still subdued. Headline PCE inflation eased to down 0.4 percent from down 0.3 percent the prior month. Year-ago core PCE inflation eased--to 1.5 percent from 1.6 percent in May. Both are within or below the Fed’s implicit inflation target of 1.5 to 2.0 percent PCE inflation.
 The Administration’s “cash for clunkers” program may be jump starting the consumer sector. Sales of North American made light vehicles jumped to an 8.2 million annual unit rate in July from 7.1 million in June—fueled heavily by $1 billion in government credits for qualifying clunkers. Combined domestics and imports sales spiked to 11.2 million units annualized from 9.7 million in June. July’s total pace was the highest since 12.5 million seen for September 2008.
We are likely to see a continuation of a high pace of sales in August as $2 billion more was just approved this past week by Congress and President Obama.
The latest numbers will boost upcoming retail sales data and will lead to increased production and employment at U.S. auto plants. While there is some question as to what month it will take place, a spike in auto production is almost certain to result in the end of the recession in the third quarter.
 Based on the ISM manufacturing index, this sector almost pulled out of recession in July. The ISM manufacturing index jumped a very big 4.1 points for the month to 48.9, hinting that an over 50 reading for the August report is possible. Strength was widespread in July. New orders topped breakeven at 55.3 vs. June's 49.2. Production rose to 57.9 from 52.5. Backlogs rose to breakeven. Employment improved to near breakeven. Inventories rose but remained in negative territory. Prices paid also rose, up 5 points to 55.0 to hint at the beginning of pricing power.
 While the ISM manufacturing index pointed toward end of recession, the nonmanufacturing ISM survey hinted that the end is not as close as some hoped. The composite headline index slipped to 46.4 from 47.0 in June to indicate continuing month-to-month contraction for the bulk of the nation's businesses. The change from June is not that significant statistically but did dampen market excitement that the recession may be near end.
Other segments of the report were disheartening. New orders fell back 5 tenths to 48.1 while the employment index dropped almost 2 points to 41.5.
In contrast to the manufacturing report, the prices index really fell back, down more than 12 points to 41.3, reflecting the month's dip in energy prices but also indicating a general lack of pricing power and that businesses are still cutting prices to get sales.
 Another sign of the contraction in manufacturing ending soon was an unexpected jump in factory orders in June. However, a huge portion of the boost was price related. New factory orders rose 0.4 percent, following a revised 1.1 percent gain in May. Yes, this was deceleration but markets had expected a drop in new orders based on a plunge in the advance durables orders number for June. The fact that overall orders rose instead of declining got markets quite excited.
 However, the June boost to orders was not as healthy as suggested at face value. The gain came from a 2.7 percent jump in nondurables while durables fell 2.2 percent. The nondurables increase included a 13.2 percent surge in petroleum & coal products (based on shipments since nondurables have no unfilled orders). About half of this spike is price-related.
Manufacturing inventories continued to drop in June, falling 0.8 percent and helping to lower the inventory-to-sales ratio. Odds are increasing that manufacturers will have to boost production in coming months to rebuild inventories—especially if sales rise even a modest amount.
 There is another sign that housing has bottomed and is already in recovery—albeit a very sluggish one. The pending home sales index for June jumped 3.6 percent for its fifth consecutive increase. Year-on-year rates confirm the improvement, up 6.7 percent in June. The National Association of Realtors, which compiles the report, attributed the strength to affordable home prices, low mortgage rates, and ample selection. They note that sales are strongest for the lowest priced homes. But there is a big caveat against getting too excited about the latest gains. These are pending home sales and realtors have been reporting that many contracts fall through when appraisals come in and are not high enough to allow financing the sales price. Existing home sales likely are in recovery but a very modest one.
 Construction outlays in June unexpectedly rebounded with a 0.3 percent gain in June after falling 0.8 percent in May. The gain in spending in June was led by a 1.0 percent increase in public outlays. Also, private residential outlays rebounded 0.5 percent in June after a 3.1 percent drop in May. However, private nonresidential construction spending fell 0.5 percent, following a 0.4 percent decline in May.
Near-term strength in overall construction outlays is in doubt, however, given the weakness in state & local government revenues and in lending for commercial real estate. But the good news in this report was hidden in the detail for private residential outlays. Within private residential, one-family outlays rebounded 2.4 percent while the multifamily component dropped 7.2 percent. Another data point suggests that single-family housing is on the mend.
 The latest report on consumer credit outstanding points out why the jobs situation needs to improve and actually turn positive sometime soon. Consumer credit outstanding fell another $10.3 billion in June. The contraction was split evenly between revolving, down $5.3 billion, and non-revolving, down $5.0 billion.
Why has credit been on a downturn since last August' Banks are cutting down credit while consumers, hit by job loss or the fear of job loss, are paying down credit, not good news for policy makers who are trying to stimulate spending. Debt worries and lower credit limits will dampen consumer spending until job growth turns positive and a lower unemployment rate makes consumers less tight with their wallets.
The July employment report shows the recession near end—especially when you look at the detail for production worker hours. But the consumer credit report was a stark reminder that the eventual recovery is still likely to be very sluggish.
This week, traders and investors are swamped with market moving indicators. Normally, Wednesday’s FOMC announcement would be the highlight but the Fed is seen to be on hold. Retail sales will garner much attention along with industrial production since they play key roles in clarifying how close recovery is. We also get updates on international trade and the CPI.
Nonfarm productivity for the first quarter came in at a gain of 1.6 percent annualized. Meanwhile, unit labor costs rose an annualized 3.0 percent. We are likely to see higher productivity and lower labor costs in the second quarter based on less of a drop in second quarter GDP (down 1.0 percent annualized versus a revised 6.4 percent drop in the first quarter) while worker hours continued to fall in the second quarter. The output number for productivity and unit labor costs has many source components that overlap with those for GDP.
Nonfarm Productivity Consensus Forecast for initial Q2 09: +5.5 percent annual rate
Range: +3.0 to +6.2 percent annual rate
Unit Labor Costs Consensus Forecast for initial Q2 09: -2.8 percent annual rate
Range: -6.0 to -2.8 percent annual rate
The U.S. international trade gap 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. Looking ahead, a weaker dollar in recent weeks points to a rise in export and possibly a dip in nonoil imports. However, oil prices rose during the month and likely will overwhelm any improvement in exports and nonoil imports. Markets should pay attention to exports for impact on U.S. manufacturing but the overall deficit for impact on the dollar.
International trade balance Consensus Forecast for June 09: -$28.5 billion
Range: -$29.6 billion to -$25.8 billion
The U.S. Treasury monthly budget report showed a budget gap totaling $94.3 billion in June bringing the fiscal year-to-date total, now nine months into the 2009 fiscal year, to $1.1 trillion. The full-year gap is expected to top $1.8 trillion. The year-to-date gap through June last was only $285.9 billion. Looking ahead, the month of July typically shows a moderate deficit for the month but history provides little guide for this economy’s budget. But for historical perspective, over the past 10 years, the average deficit for the month of July has been $31.7 billion and $49.2 billion over the past 5 years.
Treasury Statement Consensus Forecast for July 09: -$180.0 billion
Range: -$181.0 billion to -$130.0 billion.
The FOMC announcement for the August 11-12 FOMC policy meeting is expected to leave the fed funds target unchanged at a range of 0.0 to 0.25 percent. Markets, however, will be looking for any commentary on improvement in the economy and on timing for unwinding the Fed’s balance sheet.
FOMC Consensus Forecast for 8/12/09 policy vote on fed funds target range: unchanged at a range of 0.0 to 0.25 percent
Retail sales posted a 0.6 percent gain in June 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 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. Looking ahead, motor vehicles sales jumped in July on the “cash for clunkers” program. But, oil prices declined for the month (even though August oil prices have jumped, they were down in July on average). The spike in autos will probably top the dip in gasoline prices. But after autos and gasoline are excluded, recent chain store sales suggest that sales will be weak.
Retail sales Consensus Forecast for July 09: +0.8 percent
Range: +0.4 to +1.6 percent
Retail sales excluding motor vehicles Consensus Forecast for July 09: +0.1 percent
Range: -0.6 to +1.2 percent
Initial jobless claims fell 38,000 to a much better-than-expected level of 550,000. Businesses appear to have made their major cuts in labor costs in earlier weeks and are now trimming fewer jobs. Continuing claims, however, rose 69,000 for the July 25 week to 6.310 million, indicating that it is still hard to get rehired.
Jobless Claims Consensus Forecast for 8/8/09: 543,000
Range: 535,000 to 550,000
Business inventories in May dropped 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. More recently, factory inventories fell 0.8 percent in June. We will get wholesale inventories for June on August 11. At this point, we are likely to get another dip in inventories in June.
Business inventories Consensus Forecast for June 09: -0.8 percent
Range: -1.2 to -0.4 percent
The consumer price index 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 7.4 percent boost in energy costs was largely due to a 17.3 percent spike in gasoline prices after a 3.1 percent gain in May. Looking ahead, energy prices are likely to dip temporarily in July and help ease the headline number. Also, the core should be very soft as the “cash for clunkers” program cut motor vehicle prices net for consumers toward the end of the month.
CPI Consensus Forecast for July 09: +0.1 percent
Range: -0.2 to +0.3 percent
CPI ex food & energy Consensus Forecast for July 09: +0.2 percent
Range: 0.0 to +0.2 percent
Industrial production fell “only” 0.4 percent in June, 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. 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. Looking ahead, the early indicators are mixed. The ISM manufacturing index, Philly Fed index, and Empire State index remain a little below breakeven for July. However, aggregate production hours rose 0.4 percent for manufacturing in July—indicating that at least the manufacturing component of industrial production will be moderately positive. A rebound in motor vehicle employment for July also suggests a boost in motor vehicle production and almost guarantees a rebound in industrial production.
Industrial production Consensus Forecast for July 09: +0.6 percent
Range: -0.3 to +1.5 percent
Capacity utilization Consensus Forecast for July 09: 68.5 percent
Range: 67.8 to 69.5 percent
The Reuter's/University of Michigan's Consumer sentiment index edged 1.4 points higher to 66.0 for the final July reading, compared to 64.6 at mid-month but still down from 70.8 for final June. Still, the latest is quite an improvement from the 56.2 reading in mid-February which marked the year's low.
Consumer sentiment Consensus Forecast for preliminary August 09: 68.5
Range: 67.2 to 70.0
Econoday Senior Writer Mark Pender contributed to this article.
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