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The latest economic news mostly showed improvement—especially for housing and manufacturing—and added to the view that the recession has ended. The alternative view is that the economy is going to double dip back into recession. Unfortunately, given the likelihood of a sluggish recovery, the data are going to be choppy in coming months. Bulls and bears will both get supporting numbers. And the double dip concern is likely to stay for a while. This is because some key indicators are likely to reverse course at least temporarily due to the ending of certain fiscal stimulus programs.
 Equities were down notably for the week even though most economic data showed improvement. U.S. stocks started the week badly, pulled down on Monday by a nearly 7 percent plunge in the Shanghai Composite Index and on concern that the Chinese government is going to withdraw liquidity from its economy. Investors world-wide are counting on China’s economy to be an engine of growth for other economies. Markets focused Tuesday on fears of further credit-related losses by banks in coming quarters. Tuesday’s sharp decline ignored a better-than-expected ISM manufacturing index that topped 50 (indicating growth in this sector) and beating expectations.
The biggest negative on economic news was a larger-than-expected decline in ADP payroll employment, which bumped equities further down on Wednesday. The news renewed fears that the alleged recovery is faltering.
Equities made a partial rebound the last two days of the week. Better-than-expected chain store sales for August renewed market optimism. Costco and Gap particularly stood out, beating sales estimates. Equities surged on Friday in thin trading before the Labor Day weekend. The Dow posted just under a 100 point gain as the payroll employment decline for August’s employment situation report was not as bad as expected after forecasts were revised down with the ADP numbers. The moderate payroll decline eased concern that the recovery is stumbling.
Overall, investors have concluded that the recovery is going to be softer than earlier believed—especially if China is going to grow more moderately than previously expected.
 Equities were down this past week. The Dow was down 1.1 percent; the S&P 500, down 1.2 percent; the Nasdaq, down 0.5 percent; and the Russell 2000, down 1.6 percent.
However, for the month of August major indexes were up as follows: the Dow, up 3.5 percent; the S&P 500, up 3.4 percent; the Nasdaq, up 1.5 percent; and the Russell 2000, up 2.8 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 7.6 percent; the S&P 500, up 12.5 percent; the Nasdaq, up 28.0 percent; and the Russell 2000, up 14.2 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 this past week with shorter maturity rates down and the long bond yield up. Rates declined each of the first three days of the week largely on flight to safety as equities fell. Favorable economic news was mostly ignored over this period with the worse-than-expected ADP report boosting Treasuries prices. Rates were also nudged down by comments in the FOMC minutes that there is “considerable uncertainty” about the strength of the recovery.
Thursday and Friday saw reversal of flight to safety as equities posted notable gains on the better-than-expected chain store sales and payroll numbers for August. The bump up in yields on the 10-year and 30-year T-bonds showed the most movement, rising 15 basis points and 16 basis points, respectively, the last two days of the week.
For this past week Treasury rates were mixed as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 8 basis points; the 5-year note, down 10 basis points; the 7-year note, down 4 basis points; the 10-year bond, unchanged; and the 30-year bond, up 8 basis points.
 The spot price of West Texas Intermediate fell noticeably this past week despite a drawdown in inventories. Oil fell more than $4-1/2 bucks a barrel the first three days of the week, following equities down each day. Worries about the Chinese economy and the global plunge in equities heavily weighed on crude prices. The same economic news that pulled down equities also pushed down crude. Also, flight to safety boosted the dollar which helped oil prices to ease. However, the August employment report had little impact on crude prices at week end.
Net for the week, spot prices for West Texas Intermediate dropped $4.72 per barrel to settle at $68.02 – and coming in $77.27 below the record settle of $145.29 per barrel set on July 3, 2008.
Financial markets appeared to miss the fact that the economic data this past week were mostly improvements from prior months. Housing and manufacturing both were positive.
 Even the labor market is showing signs that the recession is ending. Job losses eased in August while the unemployment rate rose on a reversal of July’s questionable decline. Nonfarm payroll employment in August fell 216,000, following a decrease of 276,000 in July and a decline of 463,000 in June.
 Although generally easing, job losses still were widespread. By major categories, goods-producing jobs dropped 136,000 in August, following a 122,000 decrease the month before. The August contraction was about evenly split between construction and manufacturing. Construction jobs fell 65,000 while manufacturing dropped 63,000. The slowing in overall payroll job cuts was due to fewer pink slips in the services sector. Service-providing losses were cut in half with an 80,000 decline after falling 154,000 in July.
Wage inflation has warmed up a bit—likely due to a jump in the minimum wage. Average hourly earnings in August rose 0.3 percent, matching July’s gain. But labor-cost pressures are still soft overall. On a year-ago basis, wage inflation eased to 2.6 percent from 2.7 percent in July. The August number is the lowest since the same pace seen for June 2005.
The month’s jobs report confirmed that the July dip in the unemployment rate was a fluke. The civilian unemployment rate rebounded to 9.7 percent from 9.4 percent in July. The number of unemployed spiked 466,000 after a 267,000 drop in July. The labor force rebounded 73,000 in August after a 422,000 plunge the month before. The recent numbers are a loud reminder that the household survey (which provides the data for the unemployment rate) is much smaller than the payroll survey and is much more volatile.
The bottom line is that labor market conditions are very slowly coming out of recession. A key point is “slowly.” But the jobs trend suggests a not-far-off positive. Employers have been so aggressive in cutting labor costs during the recession that businesses may have to actually start hiring soon. If the recent decrease in job losses continues, it is plausible that net hiring begins by year end—albeit at a modest pace. The labor market recession may end sooner than many have been projecting. But gains likely will not be strong enough to return consumer spending back to a pre-recession pace.
 The administration’s clunkers for cash program resoundingly had the intended impact of boosting motor vehicle sales. But the positive effects on the economy may just be a “sugar rush” with the boost quickly ending. Unit sales of domestic-made vehicles jumped 22.3 percent in August to a 10.0 million annual rate, compared to 8.2 million in July. While domestics saw the government program lift sales, imports benefitted even more with sales surging 33.5 percent for the month. But Ford benefitted more than any other car maker—including imports. It’s just that GM and Chrysler did not get much sales lift. Combined sales for domestics and imports of autos and light trucks surged to 14.1 million annualized units, up from 11.2 million the month before and the highest sales pace since 14.3 million for May 2008.
So, how does this jump start in sales affect the economy' There are several important impacts. The most talked about is the likely boost in motor vehicle assemblies that is already underway and will be the main reason that third quarter GDP likely turns positive. Of course, now that the incentives program ended August 24, sales are certainly going to decline over the next few months. Inventory gains will be partially offset by a sales slump. Unfortunately, the fallout from softness in consumer spending will not be limited to the auto sector. Car owners that had no car notes to pay now have monthly car payments cutting into discretionary income. This will dampen consumer spending in other facets of the retail sector. Cash for clunkers may have been needed to jump start the economy and rebuild confidence. But it did not come without a price. And we have not even talked about taxpayers eventually getting the bill for subsidizing these tax credits.
 The latest ISM manufacturing report provided new ammunition for those declaring the recession to be over. The ISM's manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession to 52.9 in August from 48.9 in July. And it appears that forward momentum is building. The new orders index jumped to 64.9 in August from 55.3 the prior month.
Production was also very strong in August, at 61.9 for a 4 point gain. But manufacturers are not yet adding to inventories as many are starting to expect. The inventories index remained deeply negative at 34.4 and compared to 33.5 in July. Still, the low level of inventories will mean that production will at least track demand as orders continue to rise. The boost in activity and jump in demand for commodities by speculators have lifted prices for manufacturers’ inputs. The prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials.
 The non-manufacturing sector appears to be lagging manufacturing but at least appears to be bottoming. The ISM's non-manufacturing composite index advanced 2 points in August to 48.4 but still remains below 50, signaling that the non-manufacturing sector continued to contract but just barely. Not much improvement is likely over the next few months as the new orders index edged up 1.8 points in August to 49.9, just shy of break even and essentially indicating essentially no change in new orders.
But non-manufacturing firms continue to cut back on staff as the employment index, though improving 2 points, remains well below 50 at 43.5 -- meaning that many more respondents said their workforce decreased than increased. The prices paid index jumped almost 22 points to 63.1
 It’s hard to believe but pending home sales have now risen for six consecutive months. Pending homes sales advanced 3.2 percent in July after a 3.6 percent gain the previous month. The year-on-year rate is very strong at 12.0 percent but was helped by a low base. Pending sales are based on signed contracts for existing homes that have not yet closed. The moderate run up in sales likely has been boosted by the stimulus program to help first-time home buyers with a tax credit of up to $8,000. We are likely to see a jump in pending home sales in August and September as the first-time buyer assistance programs ends in November with closing required by November 30. That also means we may see a dip in sales after the program ends.
The minutes for the August FOMC meeting indicated that the Fed governors and District Bank presidents have increased confidence that the recession has bottomed and that growth is resuming in the second half of this year. Downside risks to the economy were seen as smaller. "Nonetheless, most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks." But the FOMC remained concerned about the consumer as labor market conditions were poor, credit conditions tight, and earlier declines in wealth continued to weigh on the consumer. But economic growth is expected to be supported by continuing monetary and fiscal policy stimulus, less aggressive inventory cutting, and growth in exports.
Inflation is seen as subdued in the near term. But there was some disagreement over long-term inflation trends, notably related to the Fed's ability to reign in expanded liquidity and federal budget deficits.
While some participants said it is too early to declare victory over the current crisis, the financial system is seen to be remarkably improved from its recent worst. But as many commentators are warning, financial institutions are not yet out of the woods -- more credit losses are likely.
"Nonetheless, several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans."
By the end of the meeting, the FOMC decided to neither expand nor contract the current plan of asset purchases for the Fed's balance sheet. Further decisions on the balance sheet were mostly postponed. The bottom line is that Fed policy is on hold, the economy is increasingly likely in recovery, but economic growth is likely to be sluggish.
The latest news shows that the economy is poised for recovery as housing sales and manufacturing activity have improved along with motor vehicle sales. But the data in coming months is likely to be choppy with the ending of cash for clunkers and the soon-to-be close of special tax incentives for first-time home buyers.
The first big economic news is Wednesday's Beige Book -- the Fed District Banks' latest take on the economy. We also get an update on export and import trends with the international trade report out on Thursday.
Labor Day Holiday, U.S. markets closed
Consumer credit outstanding in June contracted $10.3 billion, evenly split between revolving, down $5.3 billion, and non-revolving, down $5.0 billion. Consumer credit contracted at an annual rate of $5.2 billion in the second quarter, more severe than the $3.6 billion rate of contraction of the first quarter. Without a doubt this report paints a picture of the consumer in hunker down mode. Banks have been cutting down on credit limits while consumers, hit by job loss or the fear of job loss, have been paying down credit card balances. These are not good news for policy makers who are trying to stimulate spending.
Consumer credit Consensus Forecast for July 09: -$4.0 billion
Range: -$7.0 billion to -$2.5 billion
The Beige Book being prepared for the September 22-23 FOMC meeting is likely the highlight economic news for the week. Markets will be sensitive to any news on whether the consumer is starting to spend, whether housing sales and house prices are up, and if there are any signs of hiring by businesses.
The U.S. international trade gap had both good news and bad news for June. The overall U.S. trade gap widened to $27.0 billion from a revised $26.0 billion deficit the previous month. Exports advanced 2.0 percent while imports rebounded 2.3 percent. Part of the bad news was that consumers were paying more for oil products. The widening in the trade shortfall was due to a wider petroleum deficit which expanded to $17.2 billion from $13.3 billion in May. In contrast, the goods excluding petroleum gap shrank significantly to $20.0 billion from $22.6 billion in May. Behind the boost in the petroleum gap were both higher oil prices and more barrels imported. But the good news in June was the 2.0 percent gain in exports. This was good news for U.S. manufacturers.
International trade balance Consensus Forecast for July 09: -$28.0 billion
Range: -$29.5 billion to -$26.0 billion
Initial jobless claims edged down 4,000 to 570,000 in the August 29 week. There has been little net movement recently with the four-week average standing at 571,250. Continuing claims have been generally moving lower since early July, unfortunately reflecting the expiration of benefits and not necessarily new hiring. Nonetheless, continuing claims rose in data for the August 22 week, up 92,000 to 6.234 million.
Jobless Claims Consensus Forecast for 9/5/09: 565,000
Range: 550,000 to 570,000
The Reuter's/University of Michigan's Consumer sentiment index for overall August improved 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 was weaker than July, 66.6 versus 70.5, though expectations were a bit less weak, at 65.0 versus 63.2. Looking ahead we are likely to see improvement for early September based on analysis of the August numbers. 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. The second half of August represents modest improvement that could carry forward to early September.
Consumer sentiment Consensus Forecast for preliminary September 09: 67.0
Range: 65.0 to 69.0
The U.S. Treasury monthly budget report for July showed a $180.7 billion deficit with the fiscal year-to-date red ink at a numbing $1.267 trillion, compared to a deficit of $388.6 billion this time last year. Still, the July report shows a bit of improvement in receipts with the year-on-year rate down 16.9 percent versus 17.9 percent in June. Outlays, swollen by stimulus measures, were up 21.1 percent year-on-year versus June's 20.5 percent. Looking ahead, the historical perspective for the month of August typically shows a deficit and came in at a shortfall of $111.9 billion last year. Over the past 10 years, the average deficit for the month of August has been $50.8 billion and $69.8 billion over the past 5 years.
Treasury Statement Consensus Forecast for September 09: -$140.0 billion
Range: -$175.0 billion to -$130.0 billion.
Econoday Senior Writer Mark Pender contributed to this article.
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