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The data were wide ranging and all positive. This past week was the strongest for economic news in some time with hefty increases for retail sales and industrial production and with housing starts posting a moderate rebound.
 Equities posted moderately strong gains for the week, primarily on continuing positive news on the economy. However, the week started with mixed emotions as sparring between China and the U.S. over import tariffs made some nervous about any companies heavily dependent upon trade with China. The U.S. threatened higher tariffs on tires from China while China said it is considering imposing tariffs on U.S. cars and chicken meat. But investors actually seemed a little upbeat coming up on the September 15 anniversary of the collapse of Lehman Brothers. It was a reminder of how far the credit markets have progressed over the past year—and dodging financial Armageddon.
Stocks on Tuesday were boosted by much stronger-than-expected retail sales and an expectations-topping Empire State manufacturing index. Also, Fed Chairman Ben Bernanke openly stated that the recession “very likely” is over. This was something that many economists have been saying in recent week, but coming from Bernanke’s lips was more comforting. Also, billionaire investor Warren Buffet helped himself by telling a conference that he is “buying stocks”—not many investors can implicitly urge investors to move his way as can Buffet.
Nonetheless, the biggest jump in equities came on Wednesday and on economic news. Industrial production spiked in August, coming in much higher than expected with strength widespread. A large upward revision to July’s production number also helped boost equities. Stocks dipped on Thursday as housing starts’ gain was as expected but the Philly Fed manufacturing index suggested a sluggish recovery as new orders and employment components slipped. Equities were up modestly on Friday on a quiet day other than quadruple witching.
Net, it was a good week, reflecting continued improvement in the economy. Notably, traders increasingly have become convinced that the hoped-for-by-many correction to equities’ rebound is not going to happen. Those cash holders waiting for a drop in equities before jumping into stocks are starting to realize that they missed the boat and simply need to join in and take what they can get with additional stock gains.
Equities were up this past week. The Dow was up 2.2 percent; the S&P 500, up 2.5 percent; the Nasdaq, up 2.5 percent; and the Russell 2000, up 4.1 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 11.9 percent; the S&P 500, up 18.3 percent; the Nasdaq, up 35.2 percent; and the Russell 2000, up 23.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 A stronger economy lifted yields on Treasuries this past week as did an outflow of funds to equities. Bonds were under selling pressure at the start of the week as traders were nervous that the two-month low on yields the previous week was unsustainable given the strength of the economy and levels of federal debt. Yields were boosted by better-than-expected economic news on Tuesday and Wednesday, reflecting increases in retail sales, Empire State manufacturing, and industrial production. Fed Chairman Bernanke’s comment that the recession is very likely over also lifted yields.
 The was modest retrenchment in rates on Thursday on details of the Philly Fed manufacturing report that indicated that manufacturers are still laying off workers and that the recovery will be sluggish. But rates rebounded at week's end as traders focused on the fact that the Treasury is planning to sell a record $112 billion worth of U.S. debt the upcoming week. Also, funds moved into equities as stocks rallied the last day of the week.
For this past week Treasury rates were mostly up as follows: 3-month T-bill, down 6 basis points; the 2-year note, up 10 basis points; the 5-year note, up 17 basis points; the 7-year note, up 16 basis points; the 10-year bond, up 13 basis points; and the 30-year bond, up 5 basis points.
Crude oil prices firmed on strong economic data this past week—including retail sales, industrial production, and housing starts. Spot prices for West Texas Intermediate also got a lift at mid-week from a 4.7 million draw in crude stocks for the September 11 week. Traders in the oil pits increasingly see global economic recovery as under way and energy demand will be picking up.
Net for the week, spot prices for West Texas Intermediate advanced $3.11 per barrel to settle at $72.40.
The latest week’s news on retail sales, housing starts, and industrial production further corroborate that the economy is in recovery.
 Retail sales were stronger than expected in August—offering more hope that recovery is underway. Retail sales in August made a sizeable comeback—boosted by cash-for-clunkers and higher gasoline prices. Overall retail sales jumped 2.7 percent in August, following a 0.2 percent drop the previous month. Government incentives jacked up auto sales a huge 10.6 percent for the latest month. The August surge in sales was the largest monthly gain since the 3.2 percent jump in January 2006.
But the story for August was not just about autos. Sales were up sharply even after discounting autos. Excluding motor vehicles, retail sales rebounded 1.1 percent, following a 0.5 percent fall in July. But higher gasoline prices were part of the reason as gasoline station sales spiked 5.1 percent. Even so, excluding motor vehicles and gasoline, retail sales posted a 0.6 percent advance, following a 0.4 percent decrease the previous month. Components outside of autos and gasoline were unexpectedly healthy other than housing or construction related components.
The August retail sales numbers show the consumer surprisingly willing to open up wallets. The numbers will be encouraging for retailers and also will boost estimates for third quarter GDP growth.
 In August, industrial production posted another large gain, making more believers that the recession is over—especially for manufacturing. And it was not just rebuilding auto inventories after the cash-for-clunkers boost in sales. Also, a large upward revision to July also means that we may have to reconsider that the recovery began as early as July. Overall industrial production in August increased a hefty 0.8 percent, following a revised 1.0 percent boost in July. The advance in the latest month came in above the market projection for a 0.7 percent increase. July’s revision was substantially higher than the original estimate of a 0.5 percent increase. For the latest month, the manufacturing component rose 0.6 percent after surging 1.4 percent in July. For August, utilities rebounded 1.9 percent while mining output advanced 0.5 percent.
 Prepping for and responding to motor vehicle sales boosted by the cash-for-clunkers program clearly boosted industrial production as the motor vehicle component jumped a monthly 5.5 percent in August after ramping up an enormous 20.1 percent the month before. Assemblies for autos and light trucks ran at an annualized 6.42 million in August, compared to 5.74 million in July and the recession low of 3.71 million in January 2009.
But the really good news is that overall production excluding motor vehicles was still up a healthy 0.6 percent for August—for manufacturing ex-autos was up 0.4 percent.
Overall capacity utilization in August continued to rise from its recent historical low of 68.3 percent in June. This rate improved to 69.6 percent in August from 69.0 percent the month before.
Of course, the recent gains in industrial production are good news for the economy in general. They are even better news for economists wanting to claim that the recession is over. Industrial production is one of four components in the Conference Board’s coincident index which is heavily relied upon (not fully) by the National Bureau of Economic Research (NBER) to define the start and end of recession. The coincident index originally was flat for July but will likely be revised up on the sharp July revision to industrial production. And the August coincident index will likely be positive also on strong gains in industrial production and retail sales. That is, the recession almost certainly ended in August and it is somewhat likely that it ended in July.
 Both the New York and Philly Fed manufacturing indexes rose further in September. However, the detail for the Philly report gives a mixed picture for regional manufacturing.
The Empire State index rose nearly 7 points in September to 18.88. This was the highest since November 2007 when the index hit 25.02. For the Empire State, prospects look good in the near term as the new orders index advanced nearly rose 6-1/2 points to 19.84 Inventories continue to surprise, at a deeply negative minus 25.00 to indicate that manufacturers continue to destock, suggesting they are keeping down costs as much as possible despite what is an improving outlook. The best news is that six-month outlook readings are very strong with the general business conditions index up more than 4 points to 52.29.
The Philadelphia Fed's business activity index rose solidly to 14.1 for September from 4.2 in August. However, details in the report point to less strength in the near term. New orders continue to rise month-to-month but at a slower pace as the index slipped to 3.3 from 4.2. Delivery times continue to shorten, not lengthen, at minus 8.9 compared to August's minus 7.0. Manufacturers in the mid-Atlantic region are still not optimistic enough to start hiring again and in fact continue to cut back on their work force to cut costs. The Philly Fed employment index worsened to minus 14.3 from minus 12.9 in August.
But manufacturers in the Philly Fed district are still optimistic about prospects in their six month ahead forecast. The six-months-ahead business activity index decreased from 56.8 in August to 47.8 but current levels are at their highest since 2004.
 Housing appears to be in early stages of recovery—albeit a very sluggish one relative to past recoveries. Housing starts in August rose 1.5 percent, following a 0.2 percent drop the previous month. The August pace of 0.598 million units annualized was down 29.6 percent year-on-year.
 The rebound in August was led by the multifamily component which jumped 25.3 percent after plunging 15.2 percent the month before. However, the single-family component slipped 3.0 percent after rising 3.3 percent in July.
Overall, however, starts have risen significantly since the recession bottomed. Total starts are up 24.8 percent in August from the recession low of 0.479 million units in April of this year. A faster recovery pace likely would be unhealthy given the relatively moderate recovery in sales.
Housing permits also made a comeback, rising 2.7 percent, following a 1.1 percent dip in July. Permits in August came in at an annualized 0.579 million units and were down 32.4 percent on a year-ago basis.
 Consumers are feeling the heat of higher inflation at the gas station—but elsewhere inflation is subdued. The headline CPI jumped 0.4 percent in August after no change in July. In the latest month, energy costs spiked 4.6 percent after a 0.1 percent dip in July while food inflation firmed to up 0.1 percent from down 0.3 percent in July. However, core CPI inflation remained steady with a 0.1 percent gain.
Within the energy component, gasoline jumped a monthly 9.1 percent for August; fuel oil spiked 6.2 percent; electricity dipped 0.1 percent; and piped natural gas rose 0.4 percent.
 Several factors kept the core rate soft. The cash-for-clunkers tax credits helped push prices for new vehicles down by 1.3 percent. Apparel slipped 0.1 percent.
But a key factor for soft core inflation is the recession’s impact on housing. Shelter costs were sluggish, including owners’ equivalent rent rising only 0.1 percent. The recession has kept rents soft which also impact owners’ equivalent rent which is based on actual rent for owner-type houses.
Year-on-year, headline inflation rose to minus 1.4 (seasonally adjusted) from down 1.9 percent in July. The core rate eased to up 1.5 percent in July from up 1.6 percent the previous month. On an unadjusted year-ago basis, the headline number was down 1.5 percent in August while the core was up 1.4 percent.
Outside of energy, consumer price inflation is subdued, leaving the Fed flexibility for when to start unwinding its balance sheet expansion. But the higher energy costs serve as a reminder that when recovery strengthens, oil prices and headline inflation are likely headed up. Bond traders should take note.
 Producer price inflation in August spiked largely on energy while the core firmed moderately on higher motor vehicle prices. The overall PPI rebounded 1.7 percent after dropping 0.9 percent in July. The jump in the latest month was led by an 8.0 percent surge in energy costs with food price inflation also strong with a 0.4 percent boost. The August spike in energy prices was led by gasoline which surged a monthly 23.0 percent.
However, the core rate was considerably tamer, rising 0.2 percent, following a 0.1 percent decline in July. The core rate rebounded largely on a 0.7 percent gain in passenger car prices and a 0.8 percent increase for light trucks. Motor vehicle prices were artificially high as government credits helped producers raise revenues received (the basis for the PPI) while lowering costs for consumers.
For the overall PPI, the year-on-year rate increased to minus 4.3 percent from minus 6.4 percent in July (seasonally adjusted). The core rate year-ago pace eased to up 2.3 percent from up 2.6 percent the prior month. On a not seasonally adjusted basis, the year-ago decline for the headline PPI was 4.3 percent while the core was up 2.3 percent. As with the CPI, the higher energy prices should be a red flag that inflation can pick up quickly after the recovery strengthens unless the Fed and Treasury withdraw stimulus in a timely manner.
This week’s economic data resoundingly confirmed Fed Chairman Bernanke’s statement that the recession very likely is over. Over the last three months, the uptrend in housing and manufacturing has been notable. And we are seeing signs that consumer spending is picking up—even outside of special incentives. Still, most see the recovery as sluggish.
The two market moving indicators this week are the FOMC announcement on Wednesday and durables orders on Friday. But there will be heightened attention for several housing indicators-- FHFA house prices on Tuesday, existing home sales Thursday, and new home sales Friday. And Friday’s consumer sentiment number could move markets.
The Conference Board's index of leading indicators rose 0.6 percent in July—the fourth increase in a row. A fifth consecutive gain is likely given that a number of components—such as stock prices, new orders for nondefense capital goods, supplier deliveries, and housing permits have improved. But other components have worsened—included new orders for consumer goods, consumer expectations, initial jobless claims, and money supply. Look for more confirmation that the recession is over as the July coincident index is likely to be revised up from flat (from upward revisions to payroll jobs and industrial production) and the August coincident index will be riding high based on strong industrial production and retail sales.
Leading indicators Consensus Forecast for August 09: +0.7 percent
Range: +0.4 to +0.8 percent
The FOMC announcement for the September 22-23 FOMC policy meeting is expected to leave the fed funds target rate unchanged at a range of zero to 0.25 percent. Fed Chairman Ben Bernanke and other Fed officials have repeatedly stated that the fed funds target is expected to remain low for an extended period. Now, markets are focusing on any announced changes in balance sheet expansion or planned unwinding. Comments on the status of recovery will get heightened attention.
FOMC Consensus Forecast for 9/23/09 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent
Initial jobless claims fell another 12,000 in the September 12 week. This came after the surprising 19,000 drop in the Labor Day week. But continuing claims were a negative in the report, up 129,000 to 6.230 million for the September 5 week.
Jobless Claims Consensus Forecast for 9/19/09: 550,000
Range: 530,000 to 555,000
Existing home sales rose a spectacular 7.2 percent to a 5.24 million annual unit rate for July and the fourth consecutive increase. The July surge was the largest on record for the total existing-home sales series dating back to 1999. But sales were boosted by lower prices due to foreclosures and distressed sales. Distressed sales tend to have prices 15 to 20 percent lower than otherwise. The median sales price dipped another 2.0 percent in July to $178,400 and was down 15.1 percent year-on-year. Looking ahead, it would not be surprising to get some reversal of July’s surge. But with the first-time homebuyer incentive ending soon, there still could be a boost in sales in August to beat the deadline for sales to close by November 30.
Existing home sales Consensus Forecast for August 09: 5.35 million-unit rate
Range: 5.20 to 5.41 million-unit rate
Durable goods orders shot up a revised 5.1 percent in July after a 1.3 percent dip the prior month. Even after excluding an 18.5 percent surge in transportation, orders still advanced a strong 1.1 percent in the latest month. Looking ahead for August, a number of manufacturing surveys have shown a spike in new orders for the month—notably the ISM new orders index for manufacturing jumped to 64.9 from 55.3 in July.
New orders for durable goods Consensus Forecast for August 09: +1.0 percent
Range: -2.0 percent to +2.4 percent
The Reuter's/University of Michigan's Consumer sentiment index picked up nicely in the first half of September, rising 4-1/2 points to 70.2 with gains split evenly between expectations, now at 69.2, and the assessment of current conditions, at 71.8. Inflation readings were mixed with the 1-year reading, reflecting lower pump prices, down 2 tenths to a very mild 2.6 percent but the 5-year up 1 tenth to 2.9 percent.
Consumer sentiment Consensus Forecast for final September 09: 70.2
Range: 67.0 to 72.0
New home sales surged 9.6 percent in July, following an upwardly 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. Supply is down to 7.5 months, the lowest level since April 2007.
New home sales Consensus Forecast for August 09: 445 thousand-unit annual rate
Range: 425 thousand to 460 thousand-unit annual rate
Econoday Senior Writer Mark Pender contributed to this article.
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