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The U.S. economy got to play “trick or treat” early and ahead of the Halloween festivities with several economic indicators. New home sales and consumer confidence clearly were tricks with numbers being very disappointing. But equity investors got a treat on Thursday as real GDP posted a stronger-than-expected 3.5 percent annualized gain for the quarter. The relatively strong number sent the “equities-are-in-correction” traders scurrying for cover—or rather short covering for the day. Nonetheless, the question remains—how strong is the recovery and is there reason to believe equities are a little ahead of where economic growth is really headed'
 Equities fell significantly this past week, with small caps and techs taking the biggest hits. Economic reports played the bigger role in moving stocks but company news also came into play. A drop in consumer confidence on Tuesday bumped equities down. At midweek, an unexpected drop in new home sales led to a sell-off of equities—especially for homebuilders and small caps. The big positive for the week was a rebound in stocks with a better-than-expected third quarter GDP gain. The 3.5 percent GDP number led to brief market euphoria. Also, traders holding short positions (many had downgraded their forecast for GDP) had to cover quickly, helping to boost prices.
 But a sluggish personal income report and monthly dip in consumer sentiment reminded markets how weak the consumer sector is, resulting in the bears taking over again and stocks dropping despite a positive Chicago PMI at week end. Also, knocking down stocks were fears of a Citigroup bankruptcy after an analyst announced the possibility that Citigroup might be taking a $10 billion write down on taxable assets. Also, a boost in the dollar undercut the oil patch and other commodity producers. Finally, the end of October is the end of the fiscal year for many mutual funds, leading to end of quarter portfolio cleaning. But the bottom line is that stocks were in a broad-based retreat at close of the week with traders wondering whether the downtrend will pick up on Monday where it left of on Friday.
Equities were down this past week. The Dow was down 2.6 percent; the S&P 500, down 4.0 percent; the Nasdaq, down 5.1 percent; and the Russell 2000, down 6.3 percent.
For October, major indexes are mixed as follows: the Dow, unchanged (up fractionally but flat after rounding); the S&P 500, down 2.0 percent; the Nasdaq, down 3.6 percent; and the Russell 2000, down 6.9 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 10.7 percent; the S&P 500, up 14.7 percent; the Nasdaq, up 29.7 percent; and the Russell 2000, up 12.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The Treasury Department probably was the biggest beneficiary of this past week’s net negative economic data. Just when you thought ballooning supply would boost yields, the economy shows signs of sputtering and investors head to the safety of U.S. government debt.
Even though the Treasury Department sold $125 billion of T-notes in four separate auctions this week, yields were down for the week. At the auctions, demand was strong except for Thursday’s sale of 7-year notes which was the last of the week's auctions.
 During the week, Treasury yields generally followed the economic data and the stock market. The largest decline in rates was on Tuesday with the sharp decline in consumer confidence. Weak new home sales helped eased yields at mid-week. Rates were up on Thursday’s relatively strong GDP number. Yields fell at week end on flight to safety as equities plunged on Friday. Basically, rates were down net for the week on the view that the economy is not as strong as believed and on investor nervousness about how to protect capital.
For this past week Treasury rates were down as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 12 basis points; the 5-year note, down 13 basis points; the 7-year note, down 12 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 6 basis points.
 Spot prices for crude oil dipped net somewhat under $3 per barrel, largely on weak economic data and higher inventories. The biggest moves downward during the past week were on an unexpected drop in new home sales and higher oil inventories on Wednesday and on sluggish personal income and consumer sentiment on Friday. A boost in the dollar also weighed on oil prices at week end. However, unexpectedly strong third quarter GDP did interrupt the drop in crude as spot West Texas Intermediate jumped over $2 per barrel on Thursday. But net for the week, mostly negative economic news pulled down prices for crude.
 Net for the week, spot prices for West Texas Intermediate fell $2.78 per barrel to settle at $77.
Looking ahead, we are going to have to expand what we track in the oil markets. This past week, Saudi Arabia announced that starting in January 2010, it would stop using West Texas Intermediate as its benchmark for pricing its oil. This is a huge concern for the NYMEX as the oil futures contract is the main contract traded on NYMEX.
Both Saudi Arabia and many of its refinery customers have become unhappy with the WTI benchmark since it began to diverge from global oil prices this year.
The new benchmark to be used by Saudi Arabia will be the Argus Sour Crude Index which will be based on a physical market basket of U.S. Gulf coast crudes. This index is being developed by Argus, a London-based oil pricing company. These crudes have been growing in importance in terms of both production and trading activity. However, the WTI benchmark is likely to remain quite important as the delivery point for much refining in the U.S.
Even though third quarter GDP came in strong than expected, other economic news left the week a net negative.
 Third quarter GDP growth came in stronger than expected with a 3.5 percent gain, following a 0.7 percent dip in the prior quarter. The third quarter boost was the first positive GDP number since a 1.5 percent increase for the second quarter of 2008. While the third quarter gain provided a lift to investor spirits and stock prices, the real question is whether the latest GDP report points toward rising forward momentum or a possible stall. The detail is mixed on that issue.
 The improvement in real GDP in the third quarter primarily reflected upturns in personal consumption, inventory investment, exports, and residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by a rise in imports, a downturn in state and local government spending, and a deceleration in federal government spending.
 Indeed, some of the component numbers were encouraging at least at face value. PCEs rose an annualized 3.4 percent, led by durables with a 22.3 percent jump. While the latest numbers reflect an average for the quarter, a key issue is where forward momentum is. According to the latest personal income report (below), personal spending lost much of its momentum late in the quarter.
Residential investment made a partial rebound of 23.4 percent—the first gain since a 2.6 percent rise in the second quarter of 2006. The boost in housing clearly is a positive. But it has a very low base, resulting in a big percentage change, and growth in housing sales is stalling—meaning starts and housing investment will likely slow in coming months.
Inventories did add to third quarter growth but the “increase” was actually less of a decline in the change in inventories. Businesses are still facing lean inventories and any rise in demand could boost production for inventories. However, consumer spending appears to be soft after cash-for-clunkers is discounted.
Both exports and imports were up after a string of negative quarters for both. Growth in global demand is a good thing and we are likely to see moderate gains in both exports and imports in coming months. Exports will be benefitting from a low dollar.
Cash for clunkers did add substantially to third quarter growth as motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. We will not be seeing this boost to production again.
Overall, the advance report for third quarter GDP was a positive—but probably not one with as much forward momentum as hoped. Other recent indicators on consumer and housing sectors also suggest that real GDP growth in the next couple of quarters will be very sluggish.
 Market expectations were met with the latest personal income report. But the bottom line is that income is flat and spending is down. There are few signs of strength for the consumer sector going forward. Of course, cash-for-clunkers has caused a good deal of volatility in the spending numbers.
 Personal income in September was unchanged, following a 0.1 percent gain in August. But worse yet, the wages and salaries component declined 0.2 percent after rising 0.2 percent in August. Most consumers count on this component for their spending money.
With cash-for-clunkers having expired in August, consumer spending in September fell significantly on a plunge in motor vehicle sales. Personal consumption expenditures dropped 0.5 percent after a 1.4 percent surge in August. The September decline was led by durables, which fell a monthly 7.0 percent. Nondurables increased 0.7 percent while services advanced a moderate 0.2 percent.
The inflation-adjusted spending numbers call into question some of the prior day’s excitement about a stronger-than-expected GDP report. Real PCEs fell 0.5 percent in September, following a 1.4 percent spike in August and a 0.2 percent rise in July. The quarter “on average” was healthy, but on the margin, it ended with a whimper.
 Inflation was subdued in September. The headline PCE price index eased a little to a 0.1 percent increase, following a 0.3 percent jump in August. Core PCE inflation was steady with a 0.1 percent boost in September which is the pace seen for several months. The Fed is not worrying about inflation pressures for now as the PCE price indexes are within or below the Fed’s implicit inflation target zone of 1-1/2 to 2 percent PCE inflation. Year-ago headline PCE inflation was steady at minus 0.5 percent in September. Year-ago core PCE inflation was unchanged at up 1.3 percent.
The bottom line is that the latest personal income report took some wind out of the third quarter GDP number. The consumer is not doing much to move the recovery along.
 The latest numbers on the consumer mood also suggest that the consumer is sitting on the sidelines for the current phase of recovery. Both the consumer confidence index and consumer sentiment index were down in October from the prior month.
The Reuters/University of Michigan consumer sentiment index rose 1.2 points from mid-month to 70.6 but was still down from September’s level of 73.5. Weakness in October was primarily in the expectations index which fell to 68.6 from 73.5 in September. The current conditions index actually edged up to 73.7 in October from 73.4 the prior month. Consumers are less optimistic about the strength of recovery and about when jobs are going to return.
The Conference Board’s consumer attitude numbers for October were even worse than Michigan’s. The Conference Board's index fell more than 5-1/2 points to 47.7 in October, barely above 47.4 seen in July. The assessment of current conditions was alarming, at 20.7 for a nearly 2-1/2 point decline and the lowest reading yet of the cycle. The big concern is jobs. Job readings were very weak for the present situation with 49.6 percent saying jobs are hard to get and up more than 2-1/2 points from September. The expectations component also fell, down 8 points to 65.7. The drop in expectations was led by a fall in the proportion expecting higher income in coming months and by a larger share seeing a decrease in income.
Basically, both surveys show consumers less optimistic about improvement in jobs and income. Both are reasons consumers are not opening their wallets very much.
 The improvement in housing may be pausing. New single-family home sales in September fell 3.6 percent to a much lower-than-expected annual rate of 402,000. This drop was in sharp contrast to the large boost in existing home sales for the same month.
Supply on the market was steady and still elevated with months’ unchanged at 7.5 months. However, it is a notable improvement from earlier in the year and especially against the year-ago level of 10.9 months.
Apparently, the likely reason that existing home sales did well in September but not new home sales is that homebuilders are trying to keep sales prices up while those in existing home have been more willing on price concessions. The median price of new homes rose 2.5 percent in the latest month to $204,800 (data not seasonally adjusted).
Basically, the softening in new home sales points to the need to expand the tax credits for new home buyers to continue beyond November 30 and to include more than just first-time homebuyers. Such an extension does appear to be gaining momentum in Congress.
 According to new durables orders, manufacturing continues to be a bright spot in the recovery. Durable goods orders in September rebounded 1.0 percent, after a 2.6 percent drop in August, and a 4.8 percent surge in July. Excluding the transportation component, new durables orders posted a 0.9 percent boost, following a downwardly revised 0.4 percent dip in August and 0.9 percent advance in July. Overall, the gains in September indicate forward momentum for manufacturing—especially in the context of earlier strong increases mixed with occasional dips.
The rebound in new orders was led by machinery which surged a monthly 7.9 percent, followed by a 1.1 percent rebound in transportation equipment. Transportation was boosted by a rebound in defense aircraft as motor vehicles and nondefense aircraft both declined. Also posting a gain were primary metals. Fabricated metals were flat. Weakness was seen in electrical equipment, computers & electronics, and “all other” durables.
The oscillating upward direction for new durables orders is a positive for future growth in manufacturing. At this point, demand is based on inventory restocking needs and some expected growth in exports. For manufacturing to improve further, demand needs to pick up and that may be possible for exports. But consumer demand is sluggish and businesses are not yet sinking much money into equipment investment. Without consumer and business sectors improving, the strength in manufacturing is going to be limited to exports.
The latest economic news was quite mixed with the highlight being the unexpectedly high advance number for third quarter GDP. The consumer confidence index and new home sales report probably tied for the low lights of the week. The bottom line is that the fundamentals for the consumer sector are very weak. There is a good chance that growth could slow in the fourth and first quarters.
We have three market movers evenly spread out this week. ISM manufacturing is posted on Monday. The Fed’s FOMC announcement gives us an update on the Fed’s view of the economy on Wednesday—no one seriously believes the Fed is going to change rates. And the biggest news will likely be the October employment situation report on Friday.
Sales of domestic light motor vehicles fell a whopping 33.8 percent in September to an annualized a 6.62 million annual rate compared to August's stimulus-boosted 10.00 million. Combined domestic and import makes of cars and light trucks dropped to an annualized 9.22 million units from 14.09 million in August.
Motor vehicle domestic sales Consensus Forecast for October 09: 7.3 million-unit rate
Range: 6.7 to 7.6 million-unit rate
The Institute for Supply Management's 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. The 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.
ISM manufacturing index Consensus Forecast for October 09: 53.0
Range: 52.0 to 54.0
Construction spending rebounded 0.8 percent in August 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. In contrast, private nonresidential slipped 0.1 percent and public outlays dropped 1.1 percent in August. Looking ahead, based on the recent uptrend in housing starts (up in four of the last five months), the private residential component for outlays will likely post a gain for September. But high vacancy rates weigh on the nonresidential component as does state & local government revenue declines on public outlays.
Construction spending Consensus Forecast for September 09: -0.2 percent
Range: -0.6 to +0.5 percent
Factory orders in August fell 0.8 percent, following a 1.4 percent rise in July. August's data were pulled lower by durable goods. New orders for nondurables were up, reflecting higher prices for oil & coal. Looking ahead, the advance report on durables orders suggests a rebound in overall factory orders. Durable goods orders in rebounded 1.0 percent in September, after a 2.6 percent drop in August and a 4.8 percent surge in July. Also, higher oil prices will likely boost the nondurables component of factory orders in September.
Factory orders Consensus Forecast for September 09: +1.0 percent
Range: -0.8 to +1.4 percent
The composite index from the ISM non-manufacturing survey finally pushed beyond the breakeven mark of 50, rising to 50.9 in September for a solid 2-1/2 point gain. And we may see further improvement in October as the new orders index rose more than 4 points to 54.2. Also, the backlogs index spiked 10-1/2 points to 51.5 to underscore the strength.
Composite index Consensus Forecast for October 09: 51.6
Range: 50.0 to 52.3
The FOMC announcement for the November 3-4 FOMC policy meeting is expected to leave interest rates unchanged. However, the big debate is when will the Fed start withdrawing liquidity in its hugely expanded balance sheet. And does the Fed have insight on the strength of the recovery that we have not heard about yet' Economists and traders will be picking apart the announcement for changes in balance sheet plans and Fed views on the economy.
FOMC Consensus Forecast for 11/4/09 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent
Initial jobless claims edged down in the October 24 week by 1,000 to 530,000. The four-week average was 526,250, showing improvement from late September, down about 20,000. Continuing claims for the October 17 week fell a sharp 148,000 to 5.797 million. But the improvement reflects an uncertain mix of hiring together with the expiration of benefits with the latter the more likely reason.
Jobless Claims Consensus Forecast for 10/31/09: 523,000
Range: 515,000 to 525,000
Nonfarm productivity in the final reading for the second quarter was revised up slightly to an annualized 6.6 percent boost from the initial estimate of a 6.4 percent gain. Unit labor costs were revised to an annualized drop of 5.9 percent, compared to the original estimate of a 5.8 percent fall. Looking ahead, we are likely to see a notably positive gain for third quarter productivity as the output component will be somewhat tracking the third quarter GDP boost of 3.5 percent and labor inputs are likely continued to have been cut.
Nonfarm Productivity Consensus Forecast for initial Q3 09: +6.3 percent annual rate
Range: +4.8 to +8.5 percent annual rate
Unit Labor Costs Consensus Forecast for initial Q3 09: -3.9 percent annual rate
Range: -5.9 to -1.8 percent annual rate
Nonfarm payroll employment in September fell 263,000, following a decline of 201,000 in August and a decrease of 304,000 in July. Job losses were widespread in both goods-producing and service-providing sectors. Wage inflation eased sharply as average hourly earnings in September grew 0.1 percent, following a 0.4 percent gain in August. Turning to the household survey, the civilian unemployment rate continued its uptrend, rising to 9.8 percent from 9.7 percent in August. Looking ahead, relatively unchanged initial unemployment claims in recent weeks suggest little progress in cutting payroll job losses for October and the unemployment rate is likely to drift higher.
Nonfarm payrolls Consensus Forecast for October 09: -175,000
Range: -200,000 to -55,000
Unemployment rate Consensus Forecast for October 09: 9.9 percent
Range: 9.9 to 10.1 percent
Average workweek Consensus Forecast for October 09: 33.1 hours
Range: 33.0 to 33.1 hours
Average hourly earnings Consensus Forecast for October 09: +0.1 percent
Range: +0.1 to +0.3 percent
Consumer credit outstanding has been showing signs of ill health as consumer credit outstanding contracted a steep $12.0 billion in August after a giant $19.0 billion drop in July. Revolving credit outstanding fell $9.9 billion, following a $2.4 billion decline in July. Non-revolving credit got support from cash-for-clunker sales, helping to limit the decrease in August to only $2.1 billion—much less severe than July's $16.6 billion contraction. Looking ahead, September is likely to be a large negative as non-revolving credit will take a hit from the expiration of cash-for-clunkers in August.
Consumer credit Consensus Forecast for September 09: -$10.0 billion
Range: -$20.0 billion to -$6.0 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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