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It was not long ago that dysfunction in Washington led stocks down. Now, the two big issues are potential contagion from Europe over sovereign debt worries and on slowing growth in the U.S.
 It was a very ugly week for stocks. But the week started on an upbeat note. Stocks advanced for a third day on a combination of deal news and speculation that European leaders would get control of the Eurozone's debt problems. Google announced a deal to acquire Motorola Mobility. Equities rose despite a negative number for the Empire State manufacturing report.
On Tuesday, expectations were high that German Chancellor Angela Merkel and French President Nicolas Sarkozy would announce a plan to contain the region's sovereign debt woes. But instead of a quick bailout, the two leaders announced longer-term plans for closer Eurozone integration and stocks sank. Earlier, German GDP growth for the second quarter was essentially flat, falling far short of expectations. U.S. indicators were mixed with housing starts down but industrial production up smartly. Equities were mixed at mid-week as technology stocks were pulled down by Dell downgrading revenue expectations while retailer earnings were mixed.
The huge downdraft in equities was on Thursday as all major indexes dropped sharply. A variety of factors came into play. Economic news from the U.S. was heavily negative. Jobless claims nudged up but alarms were set off by a large plunge in the Philly Fed manufacturing index with existing home sales unexpectedly dipping. Leading indicators were up but largely on special factors. Morgan Stanley heavily contributed to the sell off with a downgrade in its economic outlook. News out of Europe added to the plunge as a single bank, out of nearly 8,000 in the euro area, took advantage of a European Central Bank program to guarantee liquidity. The bank, which was not identified, borrowed US$500 million, a relatively modest sum. But it was the first time any bank had tapped the program since February.
The week closed on a down note with no real economic news for the day. However, Hewlett-Packard weighed on techs after it confirmed Thursday that it was in discussions to sell its PC division. Overall, trading was thin as many traders took a long weekend.
Equities were down sharply this past week. The Dow was down 4.0 percent; the S&P 500, down 4.7 percent; the Nasdaq, down 6.6 percent; and the Russell 2000, down 6.6 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 6.6 percent; the S&P 500, down 10.7 percent; the Nasdaq, down 11.7 percent; and the Russell 2000, down 16.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields continued downward, largely on flight to safety from equities. The downward drift was despite a rise in headline inflation numbers for the PPI and CPI. Some of the upward pressure on inflation was seen as temporary—especially since prices for crude oil have come down. Downward pressure on Treasury yields also came from weak economic news—notably housing starts, existing home sales, and the Philly Fed report.
Some Treasury yields are at record lows due to the weak economic news, flight to safety and the Fed’s pledge to keep rates low until mid-2013.
 For this past week Treasury rates were mostly down as follows: 3-month T-bill, down 1 basis point; the 5-year note, down 6 basis points; the 7-year note, down 13 basis points; the 10-year note, down 16 basis points; and the 30-year bond, down 3 basis points. The 2-year note edged up 1 basis point.
Yields have fallen significantly since the Fed’s FOMC policy statement on August 9 to keep rates low until mid-2013.
 The price of crude largely tracked equities this past week. The spot price of West Texas Intermediate rose $2-1/2 on Monday. Crude followed equities with better-than-expected growth in Japan adding to the lift. Disappointing German GDP pulled oil down Tuesday as did the drop in equities. A drop in the dollar supported oil at mid-week. Crude plunged more than $5 per barrel on Thursday on weak economic news (especially the Philly Fed report) and on the sharp decline in equities. The spot price of crude was little changed the last day of trading for the week.
Net for the week, spot prices for West Texas Intermediate fell $3.12 per barrel to settle at $82.26.
The latest economic news is mixed. Manufacturing was strong in July but appears to be softening in August. Housing is anemic as has been the case for some time. Inflation is up despite a dip in energy costs.
The biggest argument that second half economic growth is strengthening comes from the manufacturing sector. Overall industrial production in July posted a 0.9 percent gain, follow a 0.4 percent rise the prior month
By major industry, manufacturing showed significant improvement, advancing 0.6 percent, following rise of 0.2 percent in June (originally no change). The auto component finally made a comeback, jumping a monthly 5.2 percent after three consecutive declines including June’s 0.9 percent decrease. Essentially, auto makers recovered from supply chain disruptions brought on by Japan’s March earthquake and tsunami. And production was moderately healthy outside of autos. Excluding motor vehicles, manufacturing rose 0.3 percent, following a 0.2 percent rise in June.
Turning to other major sectors, utilities output rose 2.8 percent after increasing 0.8 percent in June. Mining output advanced 1.1 percent after growing 1.2 percent in June.
Overall capacity utilization in July improved to 77.5 percent from 76.9 percent the prior month. The June number came in higher than the median estimate for 77.0 percent.
However, more recent regional surveys of the manufacturing sector indicate slowing during the remainder of the third quarter.
 The first indications on the August manufacturing sector are strongly negative from both the New York State and mid-Atlantic regions. The Empire State index fell 3.96 points into more deeply negative territory, at minus 7.72 to indicate monthly contraction in general business conditions. Details show a third straight monthly contraction in new orders, down 2.37 points to minus 7.82. Unfilled orders contracted deeply, to minus 15.22 versus July's minus 12.22. With new orders on the slide and backlog having been worked down, the outlook for the region's shipments and employment is negative.
The six-month outlook is in fact the most negative aspect of the August report. The six-month outlook for new orders, at plus 6.52, and for shipments, at plus 7.61, are the lowest since 9/11.
But the Philly Fed report was even more disappointing. The general business activity index plunged to minus 30.7 from plus 3.2 in July. This reading indicates very significant month-to-month contraction in general business conditions for August.
The outlook is not favorable. New orders fell to minus 26.8 from plus 0.1 and unfilled orders posted at minus 20.9 versus an already dismal minus 16.3. The six-month outlook for general business activity also crumbled, coming in above zero but just barely at 1.4 versus July's 23.7.
The only positive you can say is that these surveys have at times swung quickly. We saw both the Empire State and Philly indexes dip in mid-2010 only to strengthen sharply a few months later. This time, it is quite debatable on whether such a swing is pending. The auto sector should rebound as Japan related supply constraints have eased but export momentum is not so good, given the slowing in Europe.
New housing construction in July headed back down to trend sluggishness after an unexpected boost in June. Housing starts dipped 1.5 percent in July, following a 10.8 percent jump in June (originally up 14.6 percent). The July annualized pace of 0.604 million units is up 9.8 percent on a year-ago basis.
The decline in July was led by a 4.9 percent drop in the single-family component, following a 7.5 percent surge in June. The multifamily component continued upward, gaining 7.8 percent after jumping 21.2 percent the prior month.
Homebuilders remain cautious as housing permits slipped 3.2 percent, following a 1.3 percent rise in June. The July pace of 0.597 million units annualized is up 3.8 percent on a year-ago basis. Permit weakness was in the multifamily component which fell 10.2 percent after a 5.9 percent jump the month before. Single-family permits edged up 0.5 percent, following a 1.0 percent dip in June.
Confirming the lack of enthusiasm by homebuilders is the low reading for August’s NAHB Housing Market Index, unchanged at a depressed 15. Components for present sales and buyer traffic both inched higher but were offset by a decline in sales expectations six months out.
The bottom line is that housing is still extremely anemic with perhaps mild strength in the multifamily component. Until labor markets improve significantly, this sector is likely to remain in the doldrums.
 Apparently, a recent boost in signings of existing home sales did not follow through as hoped. Existing home sales fell 3.5 percent in July to a 4.67 million annual rate that was well below expectations for 4.92 million and followed a 0.6 percent rise in June.
Supply on the market at the current sales pace turned higher to 9.4 months from 9.2 and 9.1 in the two prior months. In turn, the median price slipped 0.9 percent to $174,000 and down 0.8 percent for the average to $224,200. Year-on-year prices, which had turned positive in June, are back in the negative column, at minus 4.4 percent for the median.
Earlier, the pending home sales report showed healthy gains in May and June of 8.2 percent and 2.4 percent, respectively. Pending home sales, which are based on contract signings, typically take one to two months to close and normally would have lifted July sales. However, tighter lending standards have caused this statistical relationship to fall apart somewhat. Overall, housing remains in the doldrums.
Consumer price inflation surged in July on stronger gasoline and food costs. The consumer price index in July jumped 0.5 percent, following a 0.2 percent dip the prior month. Excluding food and energy, the CPI increased 0.2 percent after a 0.3 percent jump the prior month.
 Turning to major components, energy rebounded 2.8 percent after dropping 4.4 percent the month before. Gasoline jumped 4.7 percent, following a 6.8 percent plunge in June. Food price inflation accelerated, jumping 0.4 percent, following a 0.2 percent rise in June. Within the core the shelter index accelerated in July (largely lodging, up 0.9 percent), and the apparel index again increased sharply (up 1.2 percent). In contrast, the index for new vehicles was unchanged after a long string of increases.
Year-on-year, overall CPI inflation worsened to 3.6 percent from 3.4 percent (seasonally adjusted) in June. The core rate rose to 1.8 percent from 1.6 percent on a year-ago basis. On an unadjusted year-ago basis, the headline number was up 3.6 percent in July while the core was up 1.8 percent.
Despite a sluggish economy, inflation is back but most of the acceleration is supply related, notably for food. And energy rebounded only partially from the prior month. The lodging subcomponent, however, probably is seeing some improved demand which is actually a good thing. Inflation is up but not much is related to a surge in demand.
 Producer price inflation surprised on the high side despite a softening in energy costs. The culprits included food, motor vehicles, and tobacco. Producer prices in July rebounded 0.2 percent, following a 0.4 percent drop the month before.
By major components, energy dipped 0.6 percent after a 2.8 percent fall in June. Gasoline declined 2.8 percent after dropping 4.7 percent the month before. In contrast, food costs jumped another 0.6 percent, following a rebound of 0.6 the previous month.
 At the core level, PPI inflation accelerated to a 0.4 percent rise after jumping 0.3 percent in June. Analysts had forecast a rise of 0.2 percent. Strong gains were seen in tobacco products, light trucks, and pharmaceutical preparations. Nearly one-quarter of the July advance can be attributed to a 2.8 percent increase in prices for tobacco products. Light truck prices jumped 1.0 percent in the latest period while pharmaceutical preparations surged 3.2 percent. Passenger car prices rose but a more moderate 0.2 percent. Still, shortages of motor vehicle models dependent on parts from Japan continued to put upward pressure on prices.
For the overall PPI, the year-ago pace in July posted at 7.2 percent, compared to 7.0 percent in June (seasonally adjusted). The core rate in July rose to 2.5 percent from 2.3 percent the month before (seasonally adjusted). On a not seasonally adjusted basis for July, the year-ago headline PPI was up 7.2 percent while the core was up 2.5 percent.
Overall, inflation has picked up due largely to food costs and despite softer energy costs. The core rate is up significantly but likely due to temporary factors.
 While traders this past week took the view that the economy has been downgraded, the index of leading indicators suggests an upgrade. Unfortunately, special factors take a lot out of the July jump, leaving the index closer to neutral.
The index of leading economic indicators rose a very solid 0.5 percent in July, following a 0.3 percent gain the month before. However, July's strength was centered strongly in money supply with a 0.71 percentage point contribution. Normally, money supply growth means banks are lending which is a positive. But in this case, it appears that the jump in M2 was due to investors seeking safety and taking funds out of mutual funds and other investment accounts not a part of M2 and putting funds into more liquid cash-type accounts that are a part of M2.
The stock market was a positive in July (a 0.11 percentage point contribution) but that factor is all but certain to be very negative for August. This report's long-term central strength, due to Federal Reserve accommodation, has been the yield spread, one that will also give August a lift but to a lesser extent given the downturn underway in long rates. Consumer expectations were a negative in July and may again be a negative in August based on last week's consumer sentiment report. Vendor performance, in this case fast delivery times, was a negative for July and based on the latest Philly Fed and the Empire State reports, deliveries could very well be a negative again in August. One positive is unemployment claims which improved in July and which are thankfully improving again in August. Other positives were for new orders for consumer goods and for capital goods. But these are looking iffy based on the latest manufacturing surveys.
So, the leading indicators report is positive but it is lagging the latest economic news. And the latest news still points to softer growth, though still positive growth.
Financials reacted sharply to disappointing news from Europe and the U.S. While the latest U.S. economic data net suggest a downgrade to the economy, growth still is likely to improve in the second half but not as much as earlier projected. If growth does firm, the latest downgrade to equities likely is overdone.
Last week’s housing update continues with new home sales out on Tuesday and FHFA house prices on Wednesday. Manufacturing updates post with Tuesday’s Richmond Fed, Wednesday’s durables orders, and Thursday’s Kansas City Fed survey. The week closes with the Commerce Department’s second estimate for second quarter GDP. The highlight, however, likely will be Fed Chairman Ben Bernanke’s comments Friday morning at Jackson Hole on the economy and the Fed’s pledge to keep rates low until mid-2013.
New home sales in June fell 1.0 percent in to an annual rate of 312,000. By Census region, weakness was led by a monthly 15.8 drop in the Northeast with the West declining 12.7 percent. The Midwest gained 9.5 percent while the South rose 3.4 percent. Months’ supply eased a bit, to 6.3 months at June's sales rate, compared to 6.4 and 6.5 in the two prior months. Caution on the part of homebuilders has cut into supply as total homes for sale dipped 3,000 to 164,000—a new record low in nearly 50 years of data. Price strength was positive with the median up 5.8 percent to $235,200 and resulting in a year-ago gain of 7.2 percent. A caveat, however, is that this price data are not on a repeat transaction basis.
New home sales Consensus Forecast for July 11: 313 thousand-unit annual rate
Range: 302 thousand to 330 thousand-unit annual rate
The Richmond Fed manufacturing index in July fell to minus one from plus 3 the prior month. New orders contracted in the month, down 5 points versus no change in June. Despite the weakness in orders, indications on employment were mostly positive showing a plus 4 reading to indicate monthly expansion in payrolls.
Durable goods orders in June fell a revised 1.9 percent (originally down 2.1 percent), following a rebound of 2.0 percent the prior month. Transportation was the weakest component, dropping a sharp 8.6 percent, following a 5.8 percent rebound in May. All major subcomponents of transportation were down but primarily nondefense aircraft. Excluding transportation, durables edged increased a revised 0.4 percent (originally up 0.1 percent) after rebounding 0.8 percent in May.
New orders for durable goods Consensus Forecast for July 11: +2.0 percent
Range: 0.0 percent to +5.2 percent
New orders for durable goods, ex-trans., Consensus Forecast for July 11: +0.1 percent
Range: -1.3 percent to +7.5 percent
The FHFA home price index in May rose for the second month in a row. The FHFA (Federal Housing Finance Agency) purchase only house price index rose 0.4 percent in May, following a 0.2 percent increase in April.
FHFA home price index Consensus Forecast for June 11: +0.2 percent
Range: 0.0 to +0.3 percent
Initial jobless claims rose 9,000 in the August 13 week to 408,000. But the four-week average fell for the seventh straight week, down 3,500 to a 402,500 level that is nearly 20,000 lower than the month ago comparison. Continuing claims were little changed, up 7,000 to 3.702 million with the four-week average down 5,000 to 3.716 million.
Jobless Claims Consensus Forecast for 8/20/11: 405,000
Range: 400,000 to 415,000
The Kansas City Fed manufacturing index slowed in July posting a reading of 3, down from 14 in June but up from 1 in May. Future indexes were little changed from last month, as producers remained fairly optimistic about activity later this year. The future composite index was basically unchanged at 14, and the future new orders index also remained the same.
GDP for the second quarter was softer than expected, posting at a very sluggish 1.3 percent annualized rise, following a downwardly revised increase of 0.4 percent in the first quarter. The latest report included standard annual revisions going back three years for most series. Final sales of domestic product improved to up an annualized 1.1 percent from 0.0 percent (unchanged) in the first quarter (previously 0.6 percent). Final sales to domestic purchasers also nudged up, rising 0.5 percent from 0.4 percent in the prior period (previously 0.4 percent). Economy-wide inflation according to the GDP price index showed only incremental change in momentum, rising 2.3 percent, following an increase of 2.5 percent in the first quarter.
Real GDP Consensus Forecast for second estimate Q2 11: +1.1 percent annual rate
Range: +0.7 to +1.6 percent annual rate
GDP price index Consensus Forecast for second estimate Q2 11: +2.3 percent annual rate
Range: +2.3 to +2.4 percent annual rate
The Reuters/University of Michigan's consumer sentiment index for the mid-August reading plunged 8.9 points to 54.9 which is just below levels during the worst of the 2008 meltdown. This is nearly a record low, being the lowest reading since May 1980 during the period of the Iranian hostage crisis and 1980 recession. The expectations component, which is the leading component, fell 10.3 points to 45.7, a level that is severely depressed and near a record low. The current conditions component fell less severely, down more than six points to 69.3.
Consumer sentiment index Consensus Forecast for final August 11: 56.0
Range: 51.5 to 57.0
Fed Chairman Ben Bernanke speaks before the Fed’s internal economic conference at Jackson Hole, Wyoming. Given that this is his first public speaking opportunity since the FOMC pledged to keep rates low until mid-2013, markets will be riveted.
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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