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Simply Economics will be taking off next week to celebrate
Thanksgiving. Simply Economics will return on December 4, 2009.
Happy Thanksgiving from all of us at Econoday!
This past week equities took a breather, coming off recent highs. And it made sense according to the economic news. Housing starts fell back, industrial production softened, and one of two manufacturing surveys eased. But it was not all bad news—retail sales held their own and one of two key manufacturing surveys improved. Essentially, the path of recovery is not a smooth one—it is and will be uneven as shown by this past week’s news.
 Most equities fell moderately this past week, although the Dow was an exception with a modest gain. But the week got off to a good start as better-than-expected headline retail sales lifted equities sharply on Monday, more than offsetting a sluggish Empire State manufacturing report. Also, a pledge by leaders of the Asia-Pacific Economic Cooperation group to maintain stimulus spending spurred stocks at the start of the week. Stocks edged higher on Tuesday despite a soft industrial production number as higher oil and commodities prices boosted the energy sector and commodities companies. Also, Target, T.J. Maxx, and Saks reported better-than-expected profits.
The rest of the week, it was downhill for most equities after an unexpected plunge in housing starts. Techs were weighed down by below-expectations profits forecasts from Autodesk and Salesforce.com. The technology sector was hit after a Merrill analyst noted that the supply of chips is outpacing demand. Dell also announced weak quarterly results further weighing on techs. Homebuilders were downgraded after D.R. Horton announced a bigger-than-expected quarterly loss. Finally, a boost in the dollar late in the week pushed most indexes down—especially for oil and other commodities firms.
Equities were mixed but mostly down this past week. The Dow was up 0.5 percent; the S&P 500, down 0.2 percent; the Nasdaq, down 1.0 percent; and the Russell 2000, down 0.3 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 17.6 percent; the S&P 500, up 20.8 percent; the Nasdaq, up 36.1 percent; and the Russell 2000, up 17.1 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 moderately for the week with the 3-month T-bill even at times even trading with a negative yield. Rates dipped the most on Monday despite a strong headline retail sales number. The bond market focused more on the weak ex-auto, ex-gasoline number. Also, comments by Fed Chairman Bernanke that the economy still faced “headwinds” weighed on yields as did slippage in the Empire State manufacturing index. The bond market had a very different view of the economy than equities at the start of the week.
Rates rose on Wednesday despite a sharp drop in housing starts—bond traders were worried about inflation. The October CPI came in stronger than expected and comments by St. Louis Fed President James Bullard made bond traders nervous. Bullard indicated that the Fed may not raise interest rates until 2012—raising the specter that the Fed may not tighten soon enough and boost inflation.
Some short-term Treasury yields traded with negative yields on Thursday as funds flowed into Treasuries as equities slid. Some traders feared that a big correction in equities had started. There was modest reversal of this flight to safety at week end. Overall, Treasury yields ended the week lower due to both flight to safety and the view that the economy is not as strong as earlier believed.
For this past week Treasury rates were down as follows: 3-month T-bill, down 4 basis points; the 2-year note, down 9 basis points; the 5-year note, down 8 basis points; the 7-year note, down 6 basis points; the 10-year bond, down 6 basis points; and the 30-year bond, down 6 basis points.
 Crude oil prices were little changed for the week despite a run up the first three days of the week. Bumping up prices were a declining dollar, strong headline retail sales, unexpectedly low crude and refined oil inventories, and news of healthy third quarter growth for the Japanese economy. A jump in equities the first two days also led the oil pits to be optimistic about improvement in the economy and oil demand in turn.
 By Thursday, the view had changed—the mid-week drop in housing starts suggested the economy was not so strong. Oil prices followed equities down Thursday and Friday—with a rebound in the dollar also weighing on crude prices.
Net for the week, spot prices for West Texas Intermediate firmed 40 cents per barrel to settle at $76.75.
Crude oil prices have been on uptrend since the end of 2008 on the belief that the economy is improving.
Economic news bounced back and forth between the positives and negatives last week. And as usual, one had to look beyond the headline numbers to see the undercurrents. Overall, the data were net positives—just not as strong as many had hoped for.
 Consumer spending is holding up reasonably well—but not as much as the latest headline number for retail sales. Overall retail sales in October rebounded 1.4 percent after a revised 2.3 percent fall in September. The downward revision likely was the biggest negative in the report as September had previously been estimated to be a 1.5 percent decline.
The October jump in overall sales was led by a 7.4 percent rebound in auto sales after a 14.3 percent plunge in September. Excluding motor vehicles, retail sales improved 0.2 percent, following a 0.4 percent rise in September. Excluding motor vehicles and gasoline, retail sales increased 0.3 percent, matching September’s gain. Gasoline surprisingly was flat in October, following a 0.9 percent increase the month before.
Outside autos and gasoline, sales were mixed. On the positive side, the biggest gainers were food services & drinking places, nonstore retailers, and miscellaneous store retailers. Two of the biggest losers were those still suffering from the slump in housing—building materials & garden equipment and also furniture & home furnishings. Based on the core of total less autos and gasoline, sales have risen moderately although the components were mixed. Looking ahead, the question is whether consumers see the jobs and income picture improving so there is less concern about hoarding money. With unemployment, foreclosure, and delinquency rates still rising, the outlook for retailing is not rosy.
 With consumer spending not rebounding strongly as is typical in economic recovery, manufacturing has provided a big share of the boost to the economy—heavily on export demand and meeting inventory needs. But in October, the industrial sector slipped to a slower pace. Overall industrial production in October edged up 0.1 percent, following a revised 0.6 percent increase the prior month. However, the manufacturing component declined 0.1 percent, following a 0.8 percent jump in September. In the latest month, utilities output rebounded 1.6 percent while mining output dipped 0.2 percent.
 Compared to recent months, the change in auto output had a modest effect on the broad aggregates. By special category, overall production excluding motor vehicles was up 0.4 percent for October while manufacturing ex-motor vehicles was down 0.1 percent.
Recent gains in industrial production have helped to improve utilization rates—though they remain quite low. Overall capacity utilization in October continued its rise from the historical set in June, posting a gain to 70.7 percent from 70.5 percent in September. Still, the capacity utilization rate is very low and poses no threat to boosting inflation expectations.
Basically, the recovery continues but likely with an uneven trend. While there is much news yet to come, the initial numbers for the fourth quarter—notably industrial production—suggest a slower growth rate than in the third quarter.
 While industrial production moderated in October, the evidence is mixed on the direction for November. The Philly Fed manufacturing index rose while the New York Fed manufacturing index slipped—although both remained well in positive territory. The Philadelphia Fed's index rose to 16.7 in November from 11.5 in October. Employment was a big plus, only marginally negative at minus 0.5 in a big improvement and the latest hint that layoffs are winding down. New orders rose sharply, to 14.8 from 6.2 in perhaps the best reading of all, suggesting good forward momentum for mid-Atlantic manufacturing.
In contrast, the Empire State index fell back more than 11 points to 23.51 in November. The 23.51 level is still well beyond the break-even point of zero, indicating strong growth but growth is less strong than October. The new orders component also showed an easing in the pace of growth, declining to 16.66 in November from October's 34.57. The bottom line is that manufacturing growth is uneven among regions and at the national level.
 A source of strength for the economy in the third quarter was supposed to have been inventory rebuilding. Well, inventories did add to GDP growth in the third quarter but it was due to less sharp declines rather than actual increases in inventory levels. And the monthly numbers for September corroborate that picture. Business inventories fell 0.4 percent in the month, compared to a long run of much more severe draws. The decline in inventories was in proportion to the decline in sales, which fell 0.3 percent. The stock-to-sales ratio is unchanged at 1.32.
Softening the latest decline in business inventories, however, was a boost in motor vehicles as dealers and auto parts stores added more than $4 billion to their inventories in September for a 3.8 percent surge and biggest since 1992. This swing rounds out the enormous month-to-month effects from the cash-for-clunkers program. Ex-auto, retail inventories show a 0.6 percent decline with decreases across most components.
For other sectors, there is plenty of room for inventory restocking to boost the economy—if businesses become confident of a rise in demand. Excluding autos, business inventories fell a more noticeable 0.8 percent in September. While the inventory swing for the third quarter was not as strong as earlier expected, the good news is that inventory restocking will likely support growth modestly in the current quarter and even going forward.
 Housing starts are showing the impact of demand being pushed forward by tax credits for first-time homebuyers. Big questions are how much housing demand has been stolen from future months and what is the true strength of this sector' Housing starts in October unexpectedly dropped 10.6 percent, following a revised 1.9 percent gain the month before. October's 0.529 million unit pace of new home groundbreaking was down 30.7 percent on a year-ago basis. The monthly drop in October was led by a 34.6 percent plunge in multifamily starts but the single-family component also slipped—by 6.8 percent.
Homebuilders appear to be cautious about upcoming new home sales as housing permits in October dropped 4.0 percent after dipping 0.9 percent the month before. October's pace of 0.552 million units annualized was down 24.3 percent on a year-ago basis.
 October's starts numbers were disappointing and likely reflect concern by homebuilders about the housing market once the first-time homebuyer tax credit was expected to expire at the end of November. That credit has been extended and expanded and we may see some pickup in coming months in the single-family component. Weakness in the multifamily component will still be affected by high vacancy rates but this component is volatile.
 CPI inflation was warmer than expected in October and it mostly was due to oil and cash for clunkers. Headline consumer price inflation in October firmed to a 0.3 percent boost after rising 0.2 percent the month before. Core CPI inflation was unchanged with a 0.2 percent increase.
First, boosting the headline number was a 1.5 percent jump in energy prices after a 0.6 percent rise in September. Gasoline was up 1.6 percent, following a 1.0 percent increase. Food price inflation was restrained in October with a 0.1 percent rise, following a 0.1 percent dip the month before.
 The core rate was driven up by vehicle prices for the most part. According to the BLS, the indexes for used cars and trucks and for new vehicles both rose sharply and together they accounted for over 90 percent of the increase in the index for all items less food and energy. Cash for clunkers took many old vehicles off the market and prices for used vehicles jumped 3.4 percent in October. Used vehicles in the clunkers program could not be resold—part of the intent was to improve air quality by taking poor mileage vehicles off the road. New vehicle prices rose 1.6 percent.
Airlines are taking advantage of route pruning and fewer available seats as the index for airline fares increased 1.7 percent. Medical care costs rose 0.4 percent. Indicating softness in the underlying trend for the core, the shelter index was unchanged and the indexes for apparel and recreation declined.
Year-on-year, headline inflation increased to minus 0.2 percent (seasonally adjusted) from down 1.3 percent in September. The core rate was firmed to up 1.7 percent in October from up 1.5 percent in September. On an unadjusted year-ago basis, the headline number was down 0.2 percent in October while the core was up 1.7 percent. Overall, inflation outside of energy likely is not accelerating but neither is it as subdued as the Fed probably prefers.
 Once you get past energy costs, the producer price report was more benign than the CPI for October as the PPI core actually fell sharply. The overall PPI increased 0.3 percent in October after dropping 0.6 percent the month before. The increase in the latest month was led a 1.6 percent boost in energy and a 1.6 percent rise also for food. But at the core level, the PPI rate unexpectedly dropped 0.6, following a 0.1 percent dip in September. The fall at the core level was due mainly to declines in prices for light trucks and passenger cars. The Bureau of Labor Statistics indicated that the core would have been up 0.1 percent in October without the motor vehicle gains.
 Turning to some component detail, the October rise in energy prices was led by gasoline which rose 1.9 percent after declining 5.4 percent the month before.
While auto dealers boosted prices at the CPI level, that was not true for manufacturers at the PPI level. The core PPI rate was pulled down primarily by 5.2 percent drop in light truck prices and a 0.5 percent decline in prices for passenger cars. Of course, there is no used vehicle component in the PPI—used vehicles pulled down the CPI notably in October.
For the overall PPI, the year-on-year rate rose to minus 1.9 percent from minus 4.7 percent in August (seasonally adjusted). The core rate year-ago pace eased to up 0.7 percent from up 1.8 percent the prior month. On a not seasonally adjusted basis, the year-ago decrease for the headline PPI was 1.9 percent while the core was up 0.7 percent.
While finished goods prices were soft at the core level, inflation pressures firmed at earlier stages of production. In October, prices received by manufacturers of intermediate goods moved up 0.3 percent and the crude goods index increased 5.4 percent. Overall, inflation pressures are mixed with end demand keeping most prices soft for core finished goods but food, energy and commodities are maintaining upward pressures.
 The index of leading economic indicators rose 0.3 percent in October, pointing to positive but moderate growth in the first half of 2010. The big positive once again the rate spread in October, at 32 basis points between the fed funds rate and 10-year Treasury yield. The size of the spread reflects the Fed's aggressive policy to hold short rates near zero. Without the sizeable contribution from the rate spread, the leading index would have been flat for October. The slowing trend in the leading index since spring suggests that forward momentum—while still positive—is not as strong as it had been.
Outside of the spread, the remaining components are mixed with unemployment claims and stock prices key positives but with consumer expectations and building permits key and very strong negatives.
Although many economists say the recovery began in the third quarter, that is not a foregone conclusion according to the coincident index. The coincident index, used heavily by the National Bureau of Economic Research to pick business cycle peaks and troughs, was flat in October after a revised 0.1 percent dip in September. But this index had risen by 0.1 percent in both July and August after a string of negative numbers defining the continuation of recession. But because of the positive GDP number for the third quarter, the odds are probably a little better than even that recovery began in July—unless the coincident index and GDP numbers get revised down.
The recovery is showing growth that apparently sputters from time to time as was the case this past week. While the occasionally very good headline production or sales numbers get the financial markets excited, it is important to keep one eye on fundamentals—such as employment, income, home foreclosure rates, commercial vacancy rates, and others. The bottom line is that fundamentals are not as strong as some of the final demand or production numbers have been. Recovery is still on—but fundamentals and uneven data suggest it is still a moderate recovery.
We get a jump in market moving indicators just before the Thanksgiving holiday. GDP is out on Tuesday. Durables orders and personal income are posted Wednesday morning. For you Fed watchers, note that the Fed moved up the release of the FOMC minutes to Tuesday afternoon.
Existing home sales in September spiked 9.4 percent to a 5.57 million annual rate. Existing home sales have been on a healthy uptrend in recent months, showing gains in five of the last six months. Recent numbers have been boosted by the clock ticking down on tax credits for first time home buyers with closing required by November. Tax credits have been extended and expanded but we are likely to see an easing in sales as there are not as many in the eligibility pool for these tax credits as in earlier months. And rising unemployment is weighing on other potential buyers.
Existing home sales Consensus Forecast for October 09: 5.70 million-unit rate
Range: 5.29 to 5.90 million-unit rate
GDP for the third quarter in the advance estimate 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. 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. Inflation is still subdued as the GDP price index edged up 0.8 percent, following no change in the second quarter. Looking ahead, more recent monthly numbers indicate a downward revision to third quarter growth—including negatives from monthly international trade and business inventories.
Real GDP Consensus Forecast for second estimate Q3 09: +2.8 percent annual rate
Range: +2.5 to +3.4 percent annual rate
GDP price index Consensus Forecast for second estimate Q3 09: +0.8 percent annual rate
Range: +0.8 to +0.8 percent annual rate
The Conference Board's consumer confidence index for October fell more than 5-1/2 points to 47.7 in October. 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 was jobs. 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.
Consumer confidence Consensus Forecast for November 09: 47.0
Range: 44.0 to 47.0
The Minutes of the November 3-4 FOMC meeting are scheduled for release at 2:00 p.m. ET. The Fed kept interest rates unchanged but the discussion is starting to heat up over when to unwind it balance sheet expansion. Markets will be looking for more detail on this debate on the release of the minutes.
Durable goods orders in September rebounded a revised 1.4 percent, after a 2.7 percent drop in August. Excluding the transportation component, new durables orders posted a revised 1.2 percent boost, following a downwardly revised 0.5 percent dip. The rebound in new orders was led by machinery and transportation equipment. Weakness was seen in electrical equipment, computers & electronics, and “all other” durables.
New orders for durable goods Consensus Forecast for October 09: +0.5 percent
Range: +0.1 percent to +1.5 percent
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. 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 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. Looking ahead, we should see improvement in most numbers in October. The wages & salaries components should rebound as average weekly earnings were up 0.3 percent for October. Spending also should make a nice comeback as both retail sales and unit new motor vehicles rebounded in October. Inflation, however, should be up as the headline CPI rose 0.3 percent in October while the core CPI increased 0.2 percent.
Personal income Consensus Forecast for October 09: +0.2 percent
Range: 0.0 to +0.3 percent
Personal consumption expenditures Consensus Forecast for October 09: +0.5 percent
Range: +0.4 to +0.8 percent
Core PCE price index Consensus Forecast for October 09: +0.2 percent
Range: +0.1 to +0.2 percent
Initial jobless claims were unchanged in the November 14 week at 505,000. The four-week average fell 6,500 to 514,000, down for a convincing 11th straight week. Continuing claims, down 39,000 to 5.611 million in the November 7 week, extended what is an even longer run. The expiration of benefits, however, cloud the significance of this reading.
Jobless Claims Consensus Forecast for 11/21/09: 495,000
Range: 460,000 to 500,000
The Reuter's/University of Michigan's Consumer sentiment index for early November fell back a very steep 4.6 points to a very weak 66.0. Weakness was split between current conditions and the outlook. The retreat in confidence was tied to the still contracting jobs market.
Consumer sentiment Consensus Forecast final November 09: 67.0
Range: 66.0 to 69.0
New home sales in September fell 3.6 percent to a much lower-than-expected annual rate of 402,000. Supply on the market was steady and still elevated with months’ unchanged at 7.5 months. However, it was 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 were 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.
New home sales Consensus Forecast for October 09: 410 thousand-unit annual rate
Range: 385 thousand to 425 thousand-unit annual rate
U.S. Holiday: Thanksgiving Day
NYSE Recommended Early Close 1:00 ET
SIFMA Recommended Early Close 2:00 ET
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, October 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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