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Equities took a dive this past week and you would think that the economic news had been abysmal. In reality, the economic news included both positives and negatives and the magnitude of indicator movement was not dramatic—except for pending home sales on the upside. But more often than not, the numbers came in less than hoped for. Nonetheless, the economy is not falling off a cliff but is merely bouncing along the bottom in a choppy recovery.
 Economic news dominated equity markets this past week. But it was not just whether an indicator was positive or negative but whether the release number fell short of or topped consensus expectations. And markets seemed more sensitive than usual to modest misses.
But starting the week, the one notable plus was a spurt in merger & acquisition activity on Monday. Xerox agreed to buy Affiliated Computer Services while Abbott Laboratories announced plans to buy Solvay SA’s pharmaceutical unit. For the rest of the week, economic news net bumped stocks lower. A slip in consumer confidence bumped equities down as traders had expected a modest rise. This reversal outweighed another modest gain in the Case-Shiller Home Price Index. At mid-week, the ADP employment report proved unexpectedly weak while the Chicago-PMI slipped back into negative territory.
The biggest hit to equities was on Thursday. First the Monster employment index slipped followed by a larger-than-expected jump in initial jobless claims, disappointments that were followed by sharply negative motor vehicle sales. Yet there was plenty of good news on Thursday but not enough to offset the negatives. ISM manufacturing was in positive territory but fell short of expectations. And a few indicators were positive and above expectations—personal income and spending, construction outlays, and pending home sales.
By midday Thursday, the ADP, Monster and claims data had markets reevaluating expectations for the employment situation report on Friday. Several Wall Street economists downgraded their forecasts for September payroll employment. Although the drop in payroll jobs for September was well below published consensus forecasts, changes in market sentiment had already been baked in the day before, leaving equities down only moderately on Friday.
 However, the big gap between expectations heading into the week and how economic numbers turned out led to a sharp drop in equities for the week overall. No, the numbers were not that bad—but the expectations had been that high.
Equities were down this past week. The Dow was down 1.8 percent; the S&P 500, down 1.8 percent; the Nasdaq, down 2.0 percent; and the Russell 2000, down 3.1 percent.
 The good news is that this past week’s decline in equities followed a very healthy September and a stellar third quarter. For September, major indexes were up as follows: the Dow, up 2.3 percent; the S&P 500, up 3.6 percent; the Nasdaq, up 5.6 percent; and the Russell 2000, up 5.6 percent.
For the third quarter, major indexes were up as follows: the Dow, up 15.0 percent; the S&P 500, up 15.0 percent; the Nasdaq, up 15.7 percent; and the Russell 2000, up 18.9 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 8.1 percent; the S&P 500, up 13.5 percent; the Nasdaq, up 29.9 percent; and the Russell 2000, up 16.2 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The bond picture was mostly straightforward this past week. Disappointing economic news led traders to conclude that the recovery is not moving along as quickly as many had earlier believed. Again, the economic news was both positive and negative but mostly below expectations with the same news that pulled down equities also weighing on Treasury yields. Rates fell the most on Thursday after the jump in jobless claims and the underperformance of the ISM manufacturing index. The only not-so-clear daily movement was on Friday as yields firmed despite the sharper-than-forecast drop in payroll employment. Indeed, yields fell for most of the day but profit taking set in during the afternoon. Also, traders were positioning themselves ahead of the coming week’s series of heavy Treasury coupon auctions.
For this past week Treasury rates were mostly down as follows: 3-month T-bill, unchanged; the 2-year note, down 11 basis points; the 5-year note, down 15 basis points; the 7-year note, down 15 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 10 basis points.
 If the only issue had been economic indicator news, crude oil prices likely would have been down. But news on oil inventories and geopolitics trumped weak economic indicators. At mid-week an unexpected drop in gasoline inventories led spot prices for West Texas Intermediate to jump by over $3 per barrel for the day. On Thursday, uneasy negotiations between Western leaders on Iran and its nuclear programs boosted oil prices further.
Net for the week, spot prices for West Texas Intermediate rebounded $4.08 per barrel to settle at $69.95.
Economic news was mixed this past week. While the consumer sector softened net, the most current data on manufacturing suggest modest growth. And housing continues to slowly mend.
 For a final recap on second quarter GDP, the recession was quite close to ending. And the component mix for second quarter GDP adds to the argument that the third quarter will be moderately positive. For the second revision to second quarter GDP, the Commerce Department nudged up its estimate to an annualized 0.7 percent decrease from the previous estimate of a 1.0 percent decline. The upward revision was primarily due to higher estimates for business spending on software and nonresidential construction. Net, final sales are now more positive at an annualized 0.7 percent in the second quarter, compared to the second estimate of a 0.4 percent gain. On the inflation front, the GDP price index was unrevised at no change. The two key points about the latest GDP number is that GDP growth was close to break even and that there is a higher probability that an inventory boost will result in moderately positive GDP growth in the third quarter.
 The September jobs report was disappointing—but the consensus may have grown too optimistic. In reality, job losses are not nearly as severe as earlier in the recession and the unemployment rate is drifting up slowly as expected.
Nonfarm payroll employment in September fell 263,000, following a revised decline of 201,000 in August and a revised decrease of 304,000 in July. The September drop in payroll employment was worse than the consensus forecast for a 170,000 contraction.
Job losses were widespread in both goods-producing and service-providing sectors. By major categories, goods-producing jobs decreased 116,000 in September, following a 132,000 drop the month before. The latest drop was led by construction with manufacturing also declining notably. Service-providing losses surged back to a 147,000 fall, after contracting only 69,000 in August. The drop in service-providing jobs was led by trade & transportation and by government. Trade was tugged down mainly by retail jobs while government weakness was led by the non-education component of local government. Revenue shortfalls have forced local government job cuts despite fiscal stimulus monies.
While the worsening in the pace of job cuts was disappointing, the degree of worsening was modest. Also, on average the trend has been one of sharp improvement. From May through September, job losses averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 to April.
 Wage inflation is not a concern for the Fed right now, according to the latest employment report. Wage inflation eased sharply as average hourly earnings in September grew 0.1 percent, following a 0.4 percent gain in August. On a year-ago basis, average hourly earnings eased to 2.5 percent from 2.6 percent in August.
Probably the least noticed negative in the report was slippage in the average workweek. The average workweek edged down to 33.0 hours from 33.1 hours in August. Normally when coming out of recession, the workweek picks up before job growth turns positive. It is easier and quicker for employers to give employees more hours than to hire or rehire workers.
Turning to the household survey, the civilian unemployment rate continued its uptrend, rising to 9.8 percent from 9.7 percent in August and compared to the market forecast for 9.8 percent. The latest number is the highest since June 1983 when the unemployment rate stood at 10.1 percent.
Although the September jobs report was disappointing to financial markets, the letdown was tied to too much optimism. With a sluggish recovery, there is not as much forward momentum and monthly oscillations stand out even more. Importantly, the payroll numbers were not dramatically negative and on average over the last few months reflect improvement. It is too early to write off the recovery given that nearly everyone expected it to be sluggish and choppy.
 Good news for the consumer sector was seen in the latest personal income report. Income and spending were up. Importantly, consumer expenditures were positive outside of motor vehicles—an indication that the consumer is starting to show some willingness to spend more. Personal income in August edged up 0.2 percent after an upwardly revised 0.2 percent increase the month before. Also, the important wages and salaries component also rose 0.2 percent in the latest two months.
 While everyone expected spending to be up due to a surge in motor vehicle sales, unexpected good news was that consumers were spreading some cash around elsewhere, too. Consumer spending spiked on cash-for-clunkers auto purchases as personal consumption expenditures surged 1.3 percent in August, following a 0.3 percent rise in July. Once again, strength was in durables, which jumped 5.3 percent on sharply higher motor vehicle sales. Nondurables were robust also with a 2.3 percent boost while services advanced 0.4 percent.
 Inflation was mixed as the headline number was moved notably higher while the core rate was subdued. The headline PCE price index jumped to 0.3 percent after a flat reading in July. Core PCE inflation was unchanged at 0.1 percent. Year-on-year, inflation is well below the Fed’s implicit target of 1.5 to 2.0 percent as headline PCE growth firmed to minus 0.5 percent from minus 0.8 percent in July. Year-ago core PCE inflation eased to 1.3 percent from 1.4 percent in July.
The good news is that the consumer made a comeback in August—even beyond the jump in auto sales. Nondurables and services were healthy—even after discounting inflation. And there was a moderate gain in income. And soft core inflation numbers should keep the Fed happy—letting the FOMC keep interest rates low as planned. But there still are plenty of question marks about the consumer sector as early indicators for September indicate.
 Witht the end of the “cash-for-clunkers” program in August, motor vehicle sales evaporated in September, falling 34.6 percent for combined domestic and import makes of cars and light trucks. And the decline was greater than the 25.4 percent boost in August. September’s 9.2 million unit annualized sales pace is back to the rate seen from January through June of this year. September domestic-made sales came in at a 6.6 million annual rate vs. August's stimulus-boosted 10.0 million. Import makes of autos and light trucks dropped to 2.6 million from 4.1 million in August. September’s overall soft numbers indicate that the rebound in auto production is still coming but perhaps not as strong as earlier believed. Also, you can expect a very weak retail sales number for September based on the plummet in auto sales.
 Lack of progress in the jobs market appears to be undermining recent improvement in consumer attitudes. The Conference Board's Consumer Confidence Index that fell back to 53.1 in September from 54.5 in August. Both major components declined in the latest month. The present situation index declined as consumers saw both current business conditions and the labor market less favorably than in August. In part, more respondents said jobs are hard to get, 47.0 percent versus 44.3 percent in August, with less saying jobs are plentiful, a miniscule 3.4 percent vs. 4.3 percent the prior month. The expectations index decreased to 73.3 from 73.8 in August as consumers’ views of both labor markets and business conditions were downgraded. The bottom line is that forecasts for consumer spending in coming months, including the Christmas sales season, will likely need to be nudged lower.
Some of better news this past week was for housing. But there are increased signs of slippage for others segments of construction.
 Overall construction spending for August rebounded 0.8 percent in after declining 1.1 percent in July. The boost in spending in August was led by a 4.7 percent jump in private residential outlays. This reflects significant net gains in housing starts since February of this year. In contrast, private nonresidential construction spending slipped 0.1 percent in August and public outlays dropped 1.1 percent. The nonresidential component is under downward pressure from high vacancy rates in existing buildings while the public component has been constrained by declining revenues for state and local governments.
 There are further signs of housing being in the beginnings of recovery. Pending home sales jumped 6.4 percent in August, following a 3.2 percent rise the month before. Pending home sales have risen for seven consecutive months and are up on year-on-year basis in August at 12.4 percent. But not all pending sales (based on a signed contract) close. And that has been a bigger problem than usual in recent months as appraisals have frequently come in below values needed to close the sale. Appraisals have been damped by distressed sales with low prices.
 Finally, there is modest improvement in house prices—at least according to the two more reliable measures. The Case-Shiller Home Price index has risen for three months in a row. The composite-20 index rose (not seasonally adjusted) 1.6 percent in July on top of a 1.4 percent gain in June and a 0.5 percent gain in May. On seasonally adjusted basis, this index gained 1.2 percent in July after a 0.8 percent rise in June and no change in May. The FHFA (Federal Housing Finance Agency) House Price Index (purchases only) has risen three months in a row on a seasonally adjusted basis.
 More recent numbers for August show a 9.5 percent drop in the median price for new homes, according to the Census Bureau, and a 2.1 percent dip in median prices for existing homes, according to the National Association of Realtors. However, these two series are not seasonally adjusted and are affected by shifts in composition of sales. The Case-Shiller and FHFA series are seasonally adjusted and are based on repeat transactions.
Overall, house prices according to the better measures have started to recover. But there is still a ways to go for full recovery. The Case-Shiller 20-city index was still down 12.8 percent year on year and the FHFA index was down 4.2 percent. The Case-Shiller index covers a wide range of sales types while the FHFA index only includes transactions funded by or securitized by federal housing agencies.
 This past week, there actually was good news for the manufacturing sector—it just was not as good as expected. The ISM manufacturing index was little changed in September at 52.6 from August's 52.9. Importantly, it was still over 50, indicating that more purchasers are reporting expansion rather than contraction. Manufacturing appears to still have forward momentum. New orders softened a bit in September, but remained very positive and strong at 60.8—down from 64.9 in August. Prices paid continue to show upward pressure, coming in at 63.5 and down only marginally from 65.0 the prior month.
 One indicator that rattled financial markets early in the week was the Chicago PMI (officially the NAPM-Chicago Business Barometer). Supply managers in the Chicago area reported a surprising dip in business activity in September as the Chicago Business Barometer fell to 46.1 in September from 50.0 in August, indicating overall business in the Chicago area contracted slightly for the latest month. The index covers both manufacturing and non-manufacturing. The new orders index also slipped from positive territory in August to slightly negative in September.
The latest economic news reminded markets that the recovery is going to be sluggish. Net, the news was positive even though not as much as hoped for. While the consumer sector is still slow to get out of the gate, housing seems to be moving further up the track.
This week is very light for economic news with the only market moving indicator being the international trade report which is due out on Friday. But markets will check the pulse of the consumer sector with consumer credit on Wednesday and jobless claims on Thursday.
The composite index from the ISM non-manufacturing survey advanced 2 points in August to 48.4 but still remained 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 no change in new orders.
Composite index Consensus Forecast for September 09: 50.0
Range: 47.5 to 51.0
Consumer credit outstanding contracted $21.6 billion in July, a very severe reading and the largest on record. Credit declines have been sharp for six months in a row—also setting the longest streak of decreases since the credit squeeze of 1991. Looking ahead, given that unit new motor vehicle purchases spiked a monthly 25.4 percent in August, we are likely to see at least a temporary boost in consumer credit for that month.
Consumer credit Consensus Forecast for August 09: -$8.5 billion
Range: -$20.0 billion to -$5.0 billion
Initial jobless claims for the week ending September 26 rose 17,000 to 551,000 and the prior week was revised 4,000 higher to 534,000. But the four-week average dipped nearly 25,000 to 548,000, reflecting solid improvement from prior weeks.
Jobless Claims Consensus Forecast for 10/3/09: 540,000
Range: 540,000 to 556,000
The U.S. international trade gap in July worsened significantly and oil had only a little to do with it. The overall U.S. trade gap worsened to $32.0 billion from a revised $27.5 billion gap in June. But in the detail, there is good news for U.S. manufacturers as exports posted a gain of 2.2 percent after a 2.1 percent increase in June. However, imports jumped 4.7 percent after a 2.5 percent rise in June. The worsening in the trade deficit was due to a wider nonpetroleum goods deficit which grew to $23.5 billion from $19.8 billion the previous month. Import gains were widespread but led by autos and consumer goods. Meanwhile, the petroleum gap grew to $17.9 billion from $17.3 billion the previous month. Looking ahead to August, don’t look for help for the trade gap from lower oil prices. Although crude prices fell notably for the month—that is on a not seasonally adjusted basis. Seasonally adjusted, crude oil prices rose about 1.7 percent.
International trade balance Consensus Forecast for August 09: -$33.0 billion
Range: -$35.0 billion to -$29.0 billion
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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