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The debate over when the recession ended or is about to end will not be settled for probably another year. But it has become increasingly likely that the direction of the economy is now up—albeit slowly. The latest economic news points to recovery in both manufacturing and housing. But the consumer is still sitting on the sidelines.
 Despite thin trading with many in Europe still on vacation, equities traded in a relatively tight range and ended the week mixed but mostly up moderately. Equities primarily tracked economic news this past week. The biggest lift of the week was on Tuesday as markets favorably reacted to news that President Obama re-nominated Ben Bernanke to a second term as Fed chairman. Also boosting stocks were a jump in consumer confidence and monthly gains in house prices according to both the Case-Shiller index and FHFA index. On Wednesday, the economic news was quite good with sharp increases in both durables orders and new home sales. But it’s not whether the news was good or not but whether it beats expectations. Durables fell short while new home sales topped market forecasts and the net result was a flat day.
On Thursday, revisions to second quarter GDP were better than expected (though the quarter still declined) while jobless claims were worse than baked in. But stocks rose as the GDP number trumped jobless claims. At week end, personal income for July was a little below projections but an upward revision to June was offsetting. Even though consumer sentiment came in above expectations, profit taking set in and the week generally ended on a down note. But overall, equities posted moderate gains for a thinly traded week.
Equities were mostly up this past week. The Dow was up 0.4 percent; the S&P 500, up 0.3 percent; the Nasdaq, up 0.4 percent; and the Russell 2000, down 0.3 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 8.7 percent; the S&P 500, up 13.9 percent; the Nasdaq, up 28.6 percent; and the Russell 2000, up 16.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were down notably for notes and bonds this past week. Rates declined the most on Monday even though it was a quiet day for economic indicators. The Fed jumped in and bought federal debt and New York University professor Nouriel Roubini said that the chance of a double-dip recession had increased.
Rates eased further on Tuesday despite a better-than-expected consumer confidence number and higher house prices. President Obama’s announcement of Bernanke’s re-appointment as Fed chairman soothed fixed income markets. Also, oil prices declined and the Obama Administration predicted a continuation of low inflation.
Rates firmed slightly on Thursday as funds moved into blue chip equities. But rates eased slightly at week's end on mild flight-to-safety from equity dips. Also, the core PCE price index came in a little lower than expected.
Overall, rates were down for the week on good news about Bernanke’s reappointment, lower oil prices, and expectations of continued low inflation.
For this past week Treasury rates were down as follows: 3-month T-bill, down 3 basis points; the 2-year note, down 8 basis points; the 5-year note, down 11 basis points; the 7-year note, down 13 basis points; the 10-year bond, down 13 basis points; and the 30-year bond, down 18 basis points.
 Oil prices were little changed net this past week. However, crude hit a seven month high on Monday after Fed Chairman Bernanke and other central banks stated at a conference that the recession is ending. The biggest movement actually was a $2.27 drop on Tuesday due to profit taking by traders ahead of Wednesday’s inventory report—which was expected to show a significant rise in oil inventories.
Indeed oil supplies rose and prices slipped but most of the inventory report had already been baked in the prior day. Spot prices for West Texas Intermediate firmed slightly the last two days of the week on better-than-expected GDP, market-topping consumer sentiment, and a weaker dollar.
Net for the week, spot prices for West Texas Intermediate slipped 55 cents per barrel to settle at $72.74.
There was a lot of economic news this past week. There were new signs of recovery in manufacturing and housing. And President Obama’s re-appointment of Ben Bernanke to Fed chair is seen as improving the odds that recovery will happen sooner than later.
This past week, President Obama finally ended speculation over whom the next Fed chairman would be when Bernanke’s term as chairman expires in January. While on vacation at Martha’s Vineyard, Obama announced he is nominating Fed Chairman Ben Bernanke to a second term as chairman of the Federal Reserve. Although Bernanke’s term as a Fed governor does not expire until January 31, 2020, his term as chairman is for four years and requires reappointment. His term as chairman expires January 31, 2010 and requires Senate confirmation.
At the news conference, President Obama praised the Fed chairman for his "bold actions" and out-of-the-box thinking that prevented a second Great Depression. With brief comments, Ben Bernanke expressed his gratitude to the president "for the confidence he has shown in me with this nomination and for his unwavering support for a strong and independent Federal Reserve."
Obama’s reappointment clears the way for markets to take out uncertainty premiums on interest rates. It also makes investors more optimistic that the Fed will have the competence to deal with any unexpected bumps in the road for financial markets during recovery. Although Senate hearings on the re-nomination are likely to be messy, confirmation is highly likely.
 The second estimate for second quarter GDP was unrevised at down an annualized 1.0 percent and was significantly improved from the first quarter’s drop of 6.4 percent. Markets were happy that the latest quarter was not revised down but the biggest news from the report was a shift in the composition of components. Market worries about a downward revision to second quarter GDP did not come true and there appears to be more momentum heading into the third quarter.
With the revisions, inventories are lower and final sales are higher—meaning demand is a little better than believed and there will be greater need for inventory rebuilding in coming quarters. Final sales are now positive at an annualized 0.4 percent in the second quarter, compared to the initial estimate of a 0.2 percent dip. This follows three consecutive declines, including a 4.1 percent decline in the first quarter. The boost in final sales was from upward revisions to exports and personal consumption. However, nonresidential investment was revised down.
On the inflation front, the GDP price index was revised down marginally to flat from the initial estimate of a 0.2 percent rise.
 For those of us paying attention, personal income and spending is on track with flat income with spending about the same if you leave out the boost in auto sales from the cash for clunkers program effect. Personal income in July was unchanged after plunging a sharp 1.1 percent (revised) in June from the end of a fiscal stimulus program. The wages and salaries component was sluggish but at least gained 0.1 percent, following a 0.3 percent drop in June. Consumer spending is primarily fueled by wages and salaries.
Consumer spending was up 0.2 percent in July but it was mainly the surge in auto sales that brought about a positive number. Strength was in durables, which jumped 1.8 percent on auto sales. Nondurables dipped 0.3 percent while services increased 0.3 percent.
 Meanwhile, inflation eased substantially as energy costs softened. The headline PCE price index slowed to a flat reading after surging 0.5 percent in June. The core PCE price index also softened, rising only 0.1 percent after a 0.2 percent boost in June.
 The recession and lower oil prices have had a major impact on lowering inflation. Year-ago headline PCE inflation declined to negative 0.8 percent in July from minus 0.4 percent the prior month. Year-ago core PCE inflation slowed to 1.4 percent from 1.5 percent in June. Both measures—especially headline—are well below the Fed’s implicit target range of 1-1/2 to 2 percent inflation.
Looking ahead, the July spending numbers look anemic at face value for contributing to third quarter GDP. But with inflation flat, real PCEs rose 0.2 percent or (when using index detail) an annualized 2.6 percent. This is a respectable pace given the current hurdles to consumer spending—although after motor vehicles sales dip in August and September, PCEs will not be that strong. But with the expected boost in auto production, the third quarter is still positioned for a moderate gain in GDP.
Consumer sentiment and confidence are slowly improving but remain at low levels. The Reuters/University of Michigan consumer sentiment headline index did improve from mid-August’s 63.2 to 65.7, but still fell short of the 66.0 reading in July. The consumers' assessment of current conditions is weaker than July, 66.6 vs. 70.5, though expectations are a bit less weak, at 65.0 vs. 63.2.
 How is sentiment most recently' How are the implicit numbers for the second half of August' The Michigan survey at mid-month is based on about half of the total month’s sample. If you assume that the sample is exactly 50 percent of the month’s total, you can estimate the sentiment indexes for the second half of the month (the full month number is an average of first half and second half samples). The second half of August overall index is 68.2—up notably from mid-month’s 63.2 and even July’s 66.0. Latter half of August figures for the current index and expectations index are 68.3 and 67.9, respectively, with both being up moderately from mid-month and July. Both still fell short of recent highs set in April for current conditions and May for expectations. But going forward, the second half of August represents modest improvement.
The Conference Board’s Consumer Confidence Index showed notably greater improvement than the sentiment index. The consumer confidence index rose nearly 7 points in August to 54.1 from July's 47.4. Strength was centered in the expectations index with the present situation index rising modestly.
 Manufacturing more and more appears to be out of recession or at least close to out. New factory orders for durable shot up 4.9 percent in July after a 1.3 percent dip the prior month. Even after excluding an 18.4 percent surge in transportation, orders still advanced a strong 0.8 percent in the latest month.
Indeed the July surge was on the back of aircraft and motor vehicles. Civilian aircraft orders spiked 107.2 percent (monthly and not a typo) while motor vehicle orders, likely boosted by cash for clunkers, rose 0.9 percent.
 Nondefense capital goods orders were strong, up 8.6 percent following a 0.4 percent drop in June. Of course, this included the jump in civilian aircraft orders. Excluding aircraft, nondefense capital goods orders slipped 0.3 percent but this followed a robust 3.6 percent boost in June.
The latest shipments numbers provide more evidence that third quarter GDP will be positive. Nondefense capital goods shipments rose 0.8 percent in July and will go into both the business equipment and exports components. Plus the new orders for aircraft and especially autos point to inventory gains for the quarter.
 There is an increasing number of signs that housing, too, has hit bottom and is in recovery. New home sales, in line with gains in existing home sales, surged 9.6 percent in July following an upward revised 9.1 percent surge in June. The 433,000 annual unit pace was the best since September 2008. Importantly, the strong sales have been working down supply—good news for homebuilders. New homes on the market fell to 271,000, compared to 280,000 in June and 419,000 for July 2008. The 271,000 level is the lowest since 1993. Supply at the current sales rate is down to 7.5 months, the lowest level since April 2007 and well down from June's 8.5 months. Months’ supply peaked at 12.4 for January 2009.
The median price steadied, down only 0.1 percent in the month at $210,100 but still down 11.5 percent on a year-ago basis.
Sales clearly have been boosted by several factors, including the $8,000 first-time buyer tax credit, low mortgage rates, and low prices. The tax credit ends November 30 so there likely will be a boost in sales in September—still enough time to close by the end of November. Afterward, sales will have be driven by other factors and a new one may actually be the fear of rising house prices.
 Yes, home prices may be starting to turn up. The most recent data, however, are for existing and new home sales which declined in July, respectively, by 2.0 percent and 0.1 percent. The problem with analyzing these price changes is that both existing and new home median prices are affected by the composition of sales. If there is a shift in sales to lower priced houses, that pulls down the overall median even if prices for individual homes sold were unchanged.
Case-Shiller and Federal Housing Finance Agency house prices, in contrast, base their numbers on repeat transactions. For June (the latest month) Case-Shiller's composite 10 index rose 1.4 percent to 153.20 with the composite 20 index also up 1.4 percent. This was the second month of actual gains.
Out of tradition, the Case-Shiller press release is based on not seasonally adjusted data and it is typical that prices rise during the peak sales months of the year. But seasonally adjusted numbers are still improvements for the 20-city index with May unchanged (after months of decline) and June up 0.7 percent.
 The FHFA purchase-only index has risen two months in a row—0.7 percent in May and 0.5 percent in June.
Year-on-year rates (seasonally adjusted) are showing three months of improvement for both the Case-Shiller 20-city index and the FHFA purchase-only index with the June declines at 15.5 percent and 5.0 percent, respectively. While no serious analyst expects house prices to rebound at a fast pace, the fact that house prices are now rising on a month-ago basis, potential homebuyers no longer have the excuse of falling prices to put off buying. And that is good news for the recovery.
Manufacturing and housing increasingly appear to be starting recovery and will provide some lift to the economy. The consumer sector, however, remains anemic and likely will remain sluggish for some time. Investors are more likely to see improvement for companies tied to manufacturing (including for exports) and for housing than for consumer-related firms.
This week’s focus will be the August employment situation and whether the jobs decline will continue to ease. While the only other market moving indicator this week is ISM manufacturing on Tuesday, the Fed minutes of the August 11-12 FOMC will certainly get market attention.
The ISM-Chicago PMI Business Barometer jumped to 43.3 in July from 39.3 the month before, falling short of the breakeven mark of 50. But further improvement is likely in August. The new orders component jumped 6.4 points to a nearly break-even 48.0.
Chicago PMI Consensus Forecast for August 09: 48.0
Range: 46.0 to 50.0
The Institute for Supply Management's manufacturing index in July jumped a sharp 4.1 points for the month to 48.9, indicating that the recession in manufacturing may soon be over. Strength was widespread. And improvement is likely to continue in August as the new orders index topped breakeven at 55.3, compared to June's 49.2.
ISM manufacturing index Consensus Forecast for August 09: 50.5
Range: 49.8 to 53.5
Construction spending in June unexpectedly rebounded with a 0.3 percent gain 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. We should see a gain in July for at least the residential component, based on the recent uptrend in housing starts. But the nonresidential component is under downward pressure from corporate cutbacks and tighter credit. And the overall direction of the public component is uncertain—fiscal stimulus is a positive but shortfalls in revenues for state & local governments are weighing on public construction.
Construction spending Consensus Forecast for July 09: 0.0 percent
Range: -0.5 to +0.3 percent
Sales of domestic light motor vehicles jumped to an 8.2 million annual unit rate in July for a 15.8 percent rise from June. The jump was tied to the cash-for-clunkers program. Some of the biggest gainers were Japanese names including Toyota, Mazda, Nissan, and Honda. These names of course not only produce vehicles in North America but also sell vehicles made in Japan. But the program did help Chrysler which showed major month-to-month gains as well as Ford which posted its first year-on-year gain in two years. For the latest month, imports rose 16.0 percent to 3.1 million units. Combined domestics and imports jumped to 11.2 million units from 9.7 million in June.
Motor vehicle domestic sales Consensus Forecast for August 09: 10.5 million-unit rate
Range: 8.6 to 11.0 million-unit rate
Nonfarm productivity showed sharp improvement in the second quarter, posting a sharp gain of 6.4 percent annualized, following a revised 0.3 percent rise in the first quarter. Although layoffs are hurting the consumer sector, businesses are seeing their costs improve. Unit labor costs fell an annualized 5.8 percent after dropping a revised 2.7 percent in the first quarter.
Nonfarm Productivity Consensus Forecast for revised Q2 09: +6.4 percent annual rate
Range: +6.2 to +6.6 percent annual rate
Unit Labor Costs Consensus Forecast for revised Q2 09: -5.8 percent annual rate
Range: -6.2 to -5.6 percent annual rate
Factory orders in June rose 0.4 percent, following a revised 1.1 percent gain in May. However, much of the increase was price related. The June gain came from a 2.7 percent jump in nondurables while durables fell 2.2 percent (later revised to down 1.3 percent). The nondurables increase included a surge in petroleum & coal products. About half of this spike was price-related. More recently, the advance durables report for July suggests a healthy gain in overall factory orders for the month. Durables orders surged 4.9 percent in July on a spike in aircraft orders and auto orders.
Factory orders Consensus Forecast for July 09: +2.3 percent
Range: +1.2 to +4.5 percent
The Minutes of the August 11-12 FOMC meeting are scheduled for release at 2:00 p.m. ET. The latest FOMC announcement indicated that “economic activity is leveling out”—probably as close as the Fed dares to say that the recession is over. Markets will be poring over the minutes for more confirmation that the Fed believes the economy is starting to recover and for when the Fed begins to implement its exit strategy from a hugely expanded balance sheet.
Initial jobless claims fell 10,000 in the August 22 week to 570,000. There were no special factors in the week. The four-week average was steady at 566,250. Continuing claims fell 119,000 to 6.133 million.
Jobless Claims Consensus Forecast for 8/29/09: 562,000
Range: 555,000 to 575,000
The composite index from the ISM non-manufacturing survey slipped to 46.4 in July from 47.0 in June to indicate continuing month-to-month contraction for the bulk of the nation's businesses. August may be no better as the July new orders index fell back 5 tenths to 48.1 while the employment index dropped almost 2 points to 41.5.
Composite non-manufacturing index Consensus Forecast for August 09: 48.8
Range: 47.8 to 51.0
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. The July decrease in payroll employment was the smallest since a 175,000 decline for August 2008. Wage inflation returned more to normal in July as average hourly earnings rose 0.2 percent after no change June. 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. Looking ahead, an easing in jobless claims suggests some further slowing in the rate of decline in job losses. However, the unemployment rate is likely to rebound with a jump in the labor force.
Nonfarm payrolls Consensus Forecast for August 09: -200,000
Range: -365,000 to -115,000
Unemployment rate Consensus Forecast for August 09: 9.6 percent
Range: 9.4 to 9.7 percent
Average workweek Consensus Forecast for August 09: 33.1 hours
Range: 33.0 to 33.2 hours
Average hourly earnings Consensus Forecast for August 09: +0.2 percent
Range: 0.0 to +0.3 percent
Econoday Senior Writer Mark Pender contributed to this article.
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